Agenda item

The report set out the Authority’s borrowing and lending activities during 2021/22. All treasury activities undertaken throughout the year were in accordance with the Treasury Management Strategy 2021/22.

Economic Overview

There were a number of key economic issues in 2021/22.  Initially, the continuing economic recovery from coronavirus pandemic was a dominant feature but as the year progressed concerns about inflation, the potential for higher interest rates and possibility of a future recession were major issues.

The Bank rate was 0.1% at the beginning of the financial year.  Although April and May saw the economy gathering momentum as pandemic restrictions were eased, market expectations were that the Bank of England would delay rate rises until 2022.  However, the rise in inflation changed the position and saw the Bank Rate increase the rate late in 2021.

UK Consumer Prices Index (CPI) was 0.7% in March 2021 but thereafter began to steadily increase. Initially driven by energy price effects and by inflation in sectors such as retail and hospitality which were re-opening after the pandemic lockdowns, inflation then was believed to be temporary. However, a combination of rising global costs, strong demand and supply shortages saw large increases in inflation. CPI for February 2022 registered 6.2% year on year, up from 5.5% in the previous month.

As a response to the increase in inflation the Bank of England made the following increases in the Bank Rate: December 2021 increase to 0.25%; February 2022 increase to 0.5%; and March 2022 increase to 0.75%.  In its March interest rate announcement, the MPC noted that the invasion of Ukraine had caused further large increases in energy and other commodity prices, with the expectation that the conflict would worsen supply chain disruptions around the world and push CPI inflation to around 8% later in 2022.

The continuing uncertainty had seen gilt yields increase. The costs of authorities borrowing from the Public Loans Work Board were related to the bond yields and therefore the cost of borrowing had increased. For example, for a 10-year PWLB fixed rate loan taken on the 1 April 2021 interest was at a rate of 1.7%. An equivalent loan taken on 31 March 2022 was at 2.81%.

Borrowing

The borrowing of the Fire Authority had remained unchanged at £2m. The current capital programme had no requirement to be financed from borrowing until 2025/26 and the debt related to earlier years' capital programmes.  While the borrowing was above its Capital Financing Requirement (CFR), the underlying need to borrow for capital purposes, this was because the Fire Authority had a policy of setting aside monies in the form of statutory and voluntary minimum revenue provision (MRP) in order to repay debt as it matured or to make an early repayment.  Consideration had been given to repaying the £2m but the penalties incurred on repaying the loans early would incur significant costs estimated at £0.9m.  Also, any early repayment meant that cash balances available for investment would be reduced and hence interest receivable would also be reduced.  It was concluded that the repayment was not considered to be financially beneficial at the time.  However, the situation was periodically reviewed by the Director of Corporate Services.

Investments

Both the Chartered Institute of Public Finance and Accountancy (CIPFA) Code and the  Ministry of Housing, Communities and Local Government (MHCLG) 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. Throughout the year when investing money, the key aim was to strike an appropriate balance between risk and return.

In order to reduce credit risk to the Authority, Lancashire County Council (LCC) (credit rating by Moodys Aa3) was the main counterparty for the Authority's investments via the operation of a call account. However, the Treasury Management Strategy did permit investment with other high-quality counterparties including other local authorities. During the year the cash held by the Authority had been positive with the highest balance being £46.7m and the lowest £30.8m. The monies invested with Lancashire County Council ranged between £36.7m to £17.6m. 

By placing monies in longer term fixed rate investments it was anticipated that a higher level of interest would be earned.  However, having fixed term deals did reduce the liquidity of investments and therefore their use was limited.  At the year-end fixed investments of £15m were in place.  During the year one fixed term investment had matured and one new investment was made.  The table on page 13 of the agenda pack showed the interest earned on fixed term investments. 

The call account provided by LCC paid the base rate throughout 2021/22.  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.  The average balance in this account during the year was £25.8m earning interest of £0.047m.

The overall interest earned during this period was £0.205m at a rate of 0.56% which compared favourably with the benchmark 7-day index (Sterling Overnight rate 7 day rate) which averaged 0.2% over the same period.

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

Cash flow and interest rates continued to be monitored by the Director of Corporate Services and the County Council's treasury management team, and when rates were felt to be at appropriate levels further term deposits would be placed.

County Councillor O’Toole queried whether the Authority benefitted from the success of the County Council Treasury Management Strategy.  The Director of Corporate Services advised that the Authority had a different risk appetite and therefore did not share the County Council’s rate of return. 

Prudential Indicators

In order to control and monitor the Authority’s treasury management functions, a number of prudential indicators had been determined against which performance could be measured.  The revised indicators for 2021/22 were presented alongside the actual outturn position.

RESOLVED: - That the Committee noted and endorsed the outturn position report.