Agenda item

In accordance with the CIPFA Treasury Management Code of Practice and to strengthen Members’ oversight of the Authority’s treasury management activities, the Resources Committee received a treasury management 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 backdrop during the April to September period continued to be characterised by ongoing high inflation and its impact on consumers’ cost of living and the expectation of low growth. There was no imminent end in sight to the Russia-Ukraine hostilities and its associated impact on the supply chain, and China’s zero-Covid policy. Subsequently, UK inflation remained extremely high. Annual headline CPI hit 10.1% in July, the highest rate for 40 years, before falling modestly to 9.9% in August. RPI registered 12.3% in both July and August.

To combat inflation the Bank of England increased the official Bank Rate to 2.25% over the period. From 0.75% in March, the Monetary Policy Committee (MPC) pushed through rises of 0.25% in each of the following two MPC meetings, before hiking by 0.50% in August and again in September. Current expectations were that the Bank Rate would continue to rise.

Over the period the 5-year UK benchmark gilt yield rose from 1.41% to 4.40%, the 10-year gilt yield rose from 1.61% to 4.15%, the 20-year yield from 1.82% to 4.13% and the 50-year yield from 1.56% to 3.25%.

The Sterling Overnight Rate (SONIA) averaged 1.22% over the period. SONIA is calculated by the Bank of England based on  actual transactions reflects the average of the interest rates that banks pay to borrow sterling overnight from other financial institutions and other institutional investors.

A table in the report, now considered by Members showed the latest forecast for interest rates from Arlingclose.

Inflation pressures facing the UK were being faced by countries throughout the world. In the US inflation hit 9.1% in June, although there was some slight easing in July and August to 8.5% and 8.3% respectively. The Federal Reserve continued its fight against inflation over the period with a 0.5% hike in May followed by three increases of 0.75% in June, July and September, taking policy rates to a range of 3% - 3.25%.

Treasury Management position and Policy

The underlying need to borrow for capital purposes was measured by the Capital Financing Requirement (CFR), while usable reserves and working capital were the underlying resources available for investment. The treasury management activity was influenced both by the position at the beginning of the year and the plans in year. The position at the start of the financial year was summarised in the report indicating that the level of loans was above the borrowing requirement.  This was the result of the Authority adopting a policy of setting aside additional Minimum Revenue Provision (MRP) in order to generate the cash to repay loans either on maturity or as an early repayment. This had resulted in the CFR being reduced but due to early repayment charges it had not been financially beneficial to repay three loans.

It was not anticipated that the new capital expenditure would be funded from borrowing in the year while it was anticipated that there would be some reduction in the level of reserves held.

Borrowing

There had been no new borrowing in the first six months of the financial year. This was consistent with the position that the current borrowing was already above the CFR and that the capital programme did not include any expenditure to be financed from borrowing.

The long-term debt outstanding of £2m was from the Public Works Loan Board. The report showed the maturity profile of the Authority's borrowings, along with the interest rate paid.

There needed to be consideration for the early repayment of the loans, which would be subject to an early repayment (premium) charge.  Previous reports on treasury management activities had reported that the premium (approximately £0.8m) and the potential loss of investment income had been greater than the savings made on the interest payments therefore, it had not been considered financially beneficial to repay the loans especially with the potential for increased interest rates. However, the estimated premium charge to repay the three loans was currently £0.100m; reflecting the significant increase in base rate. To offset the net savings on repaying the loans it was estimated that future interest on investments over the remaining period of the loans would need to be 4.1%.  If it was estimated that investment interest rates would be lower than this then it may be beneficial to repay the loans, however, current forecasts indicated future base rates in excess of this.

Investments

Both the CIPFA Code and the 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. 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 (LCC) which paid the base rate. Each working day the balance on the Authority's Current Account was invested in this to ensure that interest was received on surplus balances within an acceptable risk framework. During the period all new investments were placed with the County Council via this arrangement.  At 30 September there was a balance of £36.055m invested in LCC while the average for the period was £35.187m. The current rate for these investments had increased to 2.25% on 22 September. At the beginning of the financial year the rate was 0.75%.

In addition, in order to increase the rate earned on current balances, the Authority had placed fixed investments with other local authorities. To attract a higher rate of interest than was available on the call account these investments would need to be fixed for a longer period of time. The report identified the investments that had been in place during the year.  At 30 September there was £5m fixed term investment in place, therefore the total investment held at 30 September was £41.055m. The overall rate of interest earned during this period was 1.49% which was favourable when compared with the benchmark 7-day index which averaged 1.30% over the same period.

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

Members noted that 2 further fixed term investments with other Local Authorities had now been taken out as follows:-

Current interest rates available for lending to other Local Authorities were:-

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.  At its meeting on 22 February 2022 the Authority approved the indicators for 2022/23 which were detailed in the report alongside the current actual.

Revenue Budget Implications

The 2022/23 revenue budget for treasury management activity showed that anticipated income exceeded expenditure by £200k. Taking into account the activity for the first six months of the year and estimated cash-flow for the remainder of the year the latest forecast was as below:

The interest receivable was above budget as the balances and interest rates were higher than anticipated when setting the budget. The forecast assumed interest rates on the call account averaged 3% for the remainder of the financial year.

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