Agenda item

The report set out the Authority's borrowing and lending activities during 2016/17, which were in line with decisions taken during the year to date, based on anticipated spending and interest rates prevailing at the time.

In accordance with the updated CIPFA Treasury Management Code of Practice (2011) and to strengthen Members’ oversight of the Authority’s treasury management activities, the Resources Committee received regular updates on treasury management issues including a mid-year report and a final outturn report. Reports on treasury activity were discussed on a quarterly basis with Lancashire County Council Treasury Management Team and the Authority's Director of Corporate Services and the content of these reports was used as a basis for this report to the Committee.

Economic Overview

The economic position and future outlook had been significantly influenced by the vote to leave the EU in the referendum on 23rd June 2016. This led to many economic commentators reducing their forecasts of economic growth. The risk of reduced growth was judged by the Bank of England to be severe, prompting the Monetary Policy Committee to initiate substantial monetary policy easing at its August meeting to mitigate the worst of the downside risks. This included a cut in Bank Rate to 0.25%, further gilt and corporate bond purchases (QE) and cheap funding for banks to maintain the supply of credit to the economy. Although the impact of the vote to leave the EU was highly speculative it was likely that the uncertainty on future trade relations would impact on growth and future reduction in rates were possible.

During the first part of the financial year the economy had grown. The first estimate of Q3 GDP released by the ONS showed the UK economy growing by 0.5% over the quarter and 2.3% year-on-year. Both of these figures were slightly above market expectations. The Q2 growth rates were growth of 0.7% over the quarter and 2.1% year on year.

The period had seen some change in inflation. Following BREXIT there had been a fall in the value of sterling which along with the near doubling in the price of oil in 2016 had combined to drive inflation expectations higher. Twelve-month CPI inflation had increased by 0.4% to 1.0% in September. The Bank of England was forecasting that Consumer Price Inflation would breach its 2% target in 2017, the first time since late 2013. However, the rise in inflation was highly unlikely to prompt monetary tightening by the Bank of England, with policymakers looking through import-led CPI spikes, concentrating instead on the negative effects of Brexit on economic activity and, ultimately, inflation.

The impact of the new government may also impact on economic conditions. After six years of fiscal consolidation it was seen as likely that the Autumn Statement would include fiscal initiatives to support economic activity.  This was most likely to be in the form of infrastructure investment although tax cuts or something similar could not be ruled out.

Interest Rate Environment

Short term interest rates continued at the very low levels with the Bank of England reducing the base rate to 0.25% in August which was the first movement in base rate since March 2009.

Outlook for Interest Rates

Treasury Consultants Arlingclose Ltd forecast that over the medium term, economic and political uncertainty would likely dampen investment intentions and tighten credit availability, prompting lower activity levels and potentially a rise in unemployment.  In the short term they felt the most likely scenario was for the base rate to remain constant but if there was to be a move it was likely to be a further reduction.

Borrowing

There had been no new borrowing undertaken in the first six months of the year. This was in line with the continuation of the policy of using cash balances to fund capital expenditure which had resulted in no new borrowing being undertaken since 2007.

All the Fire Authority’s existing borrowing was from the Public Works Loan Board.  The long term debt outstanding at the beginning of the year was £5.764m which had remained unchanged in the first half of the year. The next scheduled repayment of £0.250m was in December 2016 reducing the debt to £5.514m by year end. 

The Authority was required to make a minimum revenue provision for the repayment of debt.  This cash could be used to repay the debt early but the PWLB would charge an expensive premium for early repayment loss of interest and this had not been considered to be a cost effective option in this year.  With the low level of interest rates, at present the repayment of this debt was prohibitively expensive.  However in a few years’ time, as the total debt fell due to scheduled repayments and as interest rates rose, premium payments for debt redemption may become more manageable.  The actual timing of the repayment would depend upon the cost of the premiums but the current plan was to be in a position to clear the debt by 2018/19.

Investments

Both the CIPFA Code and the CLG Guidance required the Authority to invest its funds prudently, and to have regard to the security and liquidity of its investments before seeking the highest rate of return, or yield. The Authority’s objective when investing money was to strike an appropriate balance between risk and return, minimising the risk of incurring losses from defaults and the risk of receiving low investment returns and having the value of reserves eroded by inflation.

The Authority principally invested in a call account provided by Lancashire County Council which paid the base rate. Each working day the balance on the Authority's Current Account was invested in this to ensure that the interest received on surplus balances was maximised. During the period all new investments were placed with the County Council via this arrangement. At 30th September there was a balance of £36.965m with the average balance invested in LCC for the period was £31.099m.

In addition the Authority still had two long term investments that had been placed with UK local authorities as outlined below:

Therefore the total investment held at 30 September was £46.965m

The overall the rate of interest earned during this period was 0.80% which compared favourably with the benchmark 7 day index which averaged 0.43% over the same period.

Attached as appendix 1 was a forecast flow for the year.  This showed that further sums could be placed on fixed term investments.  However, to obtain a better interest rate return than the call account would involve fixing investment for at least 3 months.  This position was kept under constant review and suitable opportunities would be taken.

All investments were made in accordance with the current Treasury Management Strategy and the CIPFA treasury management code of practice.

Prudential Indicators

In order to control and monitor the Authority’s treasury management functions, a number of prudential indicators were determined against which performance may be measured. The indicators for 2016/17 were shown in the table below alongside the current actual.

RESOLVED: - That the Committee note and endorse the report.