Agenda item

The Director of Corporate Services advised that this report set out the Authority’s borrowing and lending activities during 2023/24. All treasury activities undertaken throughout the year were in accordance with the Treasury Management Strategy 2023/24.

Economic Overview

The treasury management activity was undertaken against a backdrop of inflation being above the Bank of England's target and consequently in the first part of the year increasing Bank Rate. With generally weak growth and falling inflation attention turned to when Bank Rate would peak and whether or not there would be subsequent reductions.

At the start of the year UK inflation was at 8.7% which was a fall from the peaks seen in 2022/23. The year saw inflation continuing to fall and in March 2024 the rate was at 3.2%. However, this was still above the Bank of England’s 2% target at the end of the period.

The UK economy entered a technical recession in the second half of 2023, as growth rates of -0.1% and -0.3% respectively were recorded for Q3 and Q4. Over the 2023 calendar year Gross Domestic Product (GDP) growth only expanded by 0.1% compared to 2022. Towards the end of the financial year there were signs of an increase in activity with the Office for National Statistics (ONS) reporting that the economy expanded by 0.2% in January 2024. Subsequently, the first estimate of the UK GDP in Q1 (January to March) 2024 is estimated to have increased by 0.6%.

Having begun the financial year at 4.25%, the Bank of England’s (BoE) Monetary Policy Committee (MPC) increased the Bank Rate in May, June and August to reach a level of 5.25%. The Bank Rate was maintained at 5.25% through to March 2024.

Generally, forecasts have seen 5.25% as the peak rate and following the Bank's quarterly Monetary Policy Report (MRP) in February which showed the Banks expected growth in the UK economy in the first half of 2024 and headline consumer price index (CPI) was to fall below target many forecasters anticipated that interest rates will most likely start to be cut in the second half of 2024.

Sentiment in financial markets during 2023/24 remained uncertain and bond yields, which determine the borrowing rates from the Public Works Loan Board (PWLB), continued to be volatile over the year. During the first half of the year, yields rose as interest rates continued to be pushed up in response to high inflation. From October they started declining again before falling sharply in December as falling inflation caused financial markets to expect cuts in interest rates in 2024. When it emerged in January that inflation was stickier than expected and the BoE were not inclined to cut rates soon, until yields rose once again.

Over the financial year, the 10-year UK benchmark gilt yield rose from 3.44% to peak at 4.75% in August, before then dropping to 3.44% in late December 2023 and rising again to 3.92% (28 March 2024).

Borrowing Overview

The borrowing levels of the Fire Authority remained unchanged at year end at £2m with no new long-term loans being taken. The existing loans were taken out with the 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. Total interest paid on PWLB borrowing was £90k, which equates to an average interest rate of 4.49%. The authority did take a temporary loan during the year of £5m to cover a cashflow deficit for two weeks. The interest payable on this was £0.005m at a rate of 5.25%.

The approved 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 is the underlying need to borrow for capital purposes, this was because the Fire Authority has 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 matures or to make an early repayment.

If the loans were to be repaid early there would be an early repayment (premium) charge. Previous reports on treasury management activities have reported that the premium and the potential loss of investment income have been greater than the savings made on the interest payments therefore it was not considered financially beneficial to repay the loans especially with the potential for increased interest rates. As at 30 September the estimated premium charge to repay the three loans was minimal, although rates and the premium changed on a daily basis. 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 4.5%. If it was estimated that investment interest rates would be lower than this figure, then it may have been beneficial to repay the loans. It was concluded that the repayment was not considered to be financially beneficial at the time as the expectation was that interest rates would fall during the period for which the loan was outstanding. However, the situation was, and continues to be periodically reviewed by the Director of Corporate Services.

Investments

Both the CIPFA Code and the then 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 (credit rating by Moodys A2) was the main counterparty for the Authority's investments via the operation of a call account. However, the Treasury Management Strategy does permit investment with other high-quality counterparties including other local authorities. During the year the total cash held by the Authority was positive with the highest balance being £49.0m and the lowest £25.8m. For the monies invested with Lancashire County Council the range was £34.0m to £0.7m. The balance of the call account at year end was £4.185m.

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 does reduce the liquidity of the investments and therefore their use is limited. At the year-end fixed investments of £23.5m were in place. During the year three fixed term investments had matured and 5 new investments were made. The table on page 15 of the agenda pack showed the interest earned on fixed term investments in 2023/24. 

The call account provided by Lancashire County Council paid the base rate throughout 2023/24. 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 £17.7m earning interest of £0.896m.

The overall interest earned during this financial year was £1.566m at a rate of 4.45% which compares unfavourably with the benchmark 7 day index (Sterling Overnight rate 7 day rate) which averages 4.96% over the same period. The main reason for this under performance was due to the fixed deposit taken with low rates out in previous financial periods.

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 2023/24 were presented in the report alongside the actual outturn position.

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