Agenda item

The report set out the Authority’s borrowing and lending activities during 2022/23. All treasury activities undertaken throughout the year were in accordance with the Treasury Management Strategy 2022/23.

Economic Overview

The key economic features of the year were increasing inflation and the subsequent rises in interest rates as central bankers tried to bring inflation under control. Global inflation continued above central bank targets largely as a consequence of the Ukraine war while in the UK economic outlook remained relatively weak with forecasts indicating there was a chance of a mild recession.

Starting the financial year at 5.5%, the annual Consumer Prices Index (CPI) measure of UK inflation rose strongly to hit 10.1% in July and then 11.1% in October. Inflation remained high in subsequent months but appeared to be past the peak, before unexpectedly rising again in February to 10.4% before falling back a little to 10.1% in March. However, the expectation was that the rate of inflation would fall potentially quite sharply over the next few months as the impact of the large increases in energy costs fall out of the calculation.

The labour market remained tight albeit with some ongoing evidence of potential loosening at the end of the period. The unemployment rate 3 month/year eased from 3.8% April-June to 3.6% in the following quarter, before picking up again to 3.7% between October-December. The most recent information for the period December-February showed an unemployment rate of 3.7%.

In response to the high inflation The Bank of England increased the official Bank Rate several times during the year. In March 2022 the Bank Rate stood at 0.75%. However, the Monetary Policy Committee (MPC) increased the rate at every meeting in the financial year. Recent increases of 0.5% in December and February and then 0.25% in March saw the rate rising to 4.25% (as of June 2024 it is now 5%).

Uncertainty continued to be a key driver of financial market sentiment and bond yields remained relatively volatile due to concerns over elevated inflation and higher interest rates, as well as the likelihood of the UK entering a recession and for how long the Bank of England would continue to tighten monetary policy. Towards the end of the period, fears around the health of the banking system following the collapse of Silicon Valley Bank in the US and purchase of Credit Suisse by UBS caused further volatility.

Borrowing Overview

The borrowing of the Fire Authority had remained unchanged at £2m. The loans were taken out with the Public Loans Works Board (PWLB) in 2007 when the base rate was 5.75%; with 3 loan amounts, maturity dates and respective interest rates set out in the report.  The total interest paid on borrowing was £90k which equated to an average interest rate of 4.49%. 

The current capital programme had no requirement to be financed from borrowing until 2026/27 and the debt related to earlier years' capital programmes.  While the borrowing was above its Capital Financing Requirement (CFR), which was 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 a penalty cost (referred to as a premium cost).  The penalty fluctuated with PWLB repayment rates but at the end of the financial year it was estimated the penalty would be £0.220m.  Also, any early repayment meant that cash balances available for investment would be reduced and hence interest receivable would also be reduced.  It was estimated that if interest rate on investments were at 3.3% over the remaining period of the loan, then repaying the loans during 2022/23 would be broadly neutral.  It was concluded that the repayment was not considered to be financially beneficial at the time.  The Chair, CC O’Toole commented that with interest rates going up this needed careful monitoring.  In response to a question raised by Cllr Baker, the Director of Corporate Services advised that interest and investment rates were routinely monitored frequently and as changes occurred.

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 counterparties which were considered to represent a low credit risk, including other local authorities. During the year the total cash held by the Authority had been positive with the highest balance being £46.8m and the lowest £26.7m. For the monies invested with Lancashire County Council the range was £41.8m to £16.6m. 

By placing monies in longer term fixed rate investments, it was anticipated a higher level of interest would be earned.  However, having fixed term deals did reduce the liquidity of the investment portfolio and therefore there was a limit to the amount that was advised be tied up in long term deals.  At the year-end fixed investments of £15m were in place.  During the year two fixed term investments had matured and two new investments were made.  The table on page 13 of the agenda pack showed the interest earned on fixed term investments in 2022/23. 

The call account provided by LCC paid the base rate throughout 2022/23.  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 £26.6m earning interest of £0.586m.

The overall interest earned during this period was £0.837m at a rate of 2.28% which was comparable with the benchmark 7-day index (Sterling Overnight rate 7?day rate) which averaged 2.30% 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.

Prudential Indicators

In order to control and monitor the Authority’s treasury management functions, a number of prudential indicators were determined against which performance could be measured.  The revised indicators for 2022/23 were presented in the report alongside the actual outturn position.

Resolved: That the Committee noted and endorsed the outturn position report.