Agenda item

The Director of Corporate Services (DoCS) advised that the report set out the Authority's borrowing and lending activities during 2024/25. In accordance with the Chartered Institute of Public Finance and Accountancy (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 DoCS and the content of these reports were used as a basis for this report to the Committee.

Economic Overview

Treasury management activity was taken within the context of prevailing and forecasted economic conditions. UK headline consumer price inflation remained around the Bank of England (BoE) target later in the period, falling from an annual rate of 3.2% in March to 2.0% in May and then rebounding marginally to June to 2.2% in July and August, as was expected, due to base effects from energy prices.

The UK economy continued to expand over the period, albeit slowing from the 0.7% gain in the first calendar quarter to 0.5% (downwardly revised from 0.6%) in the second. Of the monthly figures, the economy was estimated to have registered no growth in July.

Over the period, the 10-year UK benchmark gilt yield started at 3.94% and ended at 4.00% but hit a high of 4.41% in May and a low of 3.76% in mid-September. While the 20-year gilt started at 4.40% and ended at 4.51% but hit a high of 4.82% in May and a low of 4.27% in mid-September. The Sterling Overnight Rate (SONIA) averaged 5.12% over the period to 30th September.

The latest BoE Monetary Policy Report, published in August, showed policymakers expected GDP growth to continue expanding during 2024 before falling back and moderating from 2025 to 2027. Unemployment was forecast to stay around 4.5% while inflation was shown picking up in the latter part of 2024 as the previous years’ energy price declines fell out of the figures before slipping below the 2% target in 2025 and remaining there until early 2027.

Arlingclose, the authority’s treasury adviser, maintained its central view that Bank Rates would steadily fall from the 5.25% peak, with the first cut in August being followed by a series of further cuts, with November 2024 the likely next one, taking Bank Rate down to around 3% by the end of 2025. A table in the report showed the latest forecast for interest rates from Arlingclose.

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 is summarised in the Table below:

The table showed 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 had been borrowed from the Public Works Loan Board. A table in the report showed the maturity profile of the Authority's borrowings, along with an interest rate paid.

If the loans were to be repaid early there would be an early repayment (premium) charge. Previous reports on treasury management activities had reported that the premium 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, on 30 September 2023 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 3.91%. If it was estimated that investment interest rates would be lower than this figure, then it may be beneficial to repay the loans.

Investments

Both the CIPFA Code and government 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 equivalent of the Debt Management Account Deposit Facility (DMADF) overnight facility. 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 surplus balances were placed with the County Council via this arrangement. On 30 September this balance was transferred back to the authority to be managed internally. Therefore, on the 30 September this balance was invested in the DMADF overnight facility. At 30 September there was a balance of £29.875m invested in DMADF overnight facility while the average for the period for both LCC call account and DMADF deposits was £16.421m. The current rate for these investments was 4.94% in line with the current overnight rate for DMADF.

To increase the rate earned on current balances, the Authority had placed fixed term 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 £23.5m fixed term investment in place, therefore the total investment held at 30 September was £53.375m.

The overall rate of interest earned during this period was 5.322% which was more favourable when compared with the Sterling Overnight Rate (SONIA) which averaged 5.12% over the same period.

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

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. The indicators for 2024/25 were approved by the Authority on 19 February 2024 which were detailed in the report alongside the current actual.

Revenue Budget Implications

The 2024/25 revenue budget for treasury management activity showed that anticipated income would exceed expenditure by £1.050m. Considering 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 4.42% for the remainder of the financial year.

Resolved: That the Committee noted and endorsed the report.