Agenda item

The DoCS advised that this report set out the Authority’s borrowing and investment activity during 2025-26. All treasury management activity undertaken during the year was carried out in accordance with the Treasury Management Strategy for 2025-26, which was approved by the Combined Fire Authority in February 2025.

Economic Overview

As in 2024-25, inflation remained above the Bank of England’s 2% target during 2025-26. The Consumer Prices Index (CPI) was 3.5% in April 2025 and peaked at 3.8% between July and September 2025. It then fell to 3.0% in January and February 2026 before ending the year at 3.3% in March 2026. The latest available figure was 2.8% for April 2026. However, forecasts indicated that CPI could rise above 4.5% during 2026-27.

At its March 2026 meeting, the Bank of England’s Monetary Policy Committee (MPC) voted unanimously to maintain Bank Rate at 3.75%. However, the MPC indicated that rates may need to rise if inflationary pressures increased materially. The Committee stated that it “stands ready to act as necessary” and remained alert to the risk of domestic inflationary pressures feeding through into wages and prices.

This economic context was relevant to Members because changes in inflation and interest rates directly affect the Authority’s treasury position. They influenced how much it would cost to borrow in future, the level of income that could be earned on surplus cash, and the extent to which treasury performance supported the overall financial position of the Authority.

Borrowing

The Authority’s borrowing remained unchanged at £2.0 million at 31 March 2026, with no new long-term borrowing undertaken during the year. The existing loans were taken from the Public Works Loan Board (PWLB), a government body that lent to local authorities and similar public bodies, in 2007, when Bank Rate was 5.75%.

The capital programme approved for 2026-27 in February 2026 did not require borrowing until 2027-28. The current debt therefore related to earlier capital programmes. Borrowing remained above the Capital Financing Requirement (CFR), which represented the Authority’s underlying need to borrow for capital purposes. This was because the Authority had historically set aside revenue each year to repay debt through Minimum Revenue Provision (MRP), while the remaining external loans continued until their maturity dates unless repaid early. In practice, this meant the Authority had reduced its underlying need to borrow more quickly than the actual loans had been repaid.

If the loans were repaid early, a premium would be payable. Although early repayment could generate an estimated saving of £32,000 in future interest costs, the Authority was currently planning for a need to borrow from 2027-28 onwards. Any saving from early repayment would therefore need to be considered alongside the likely cost of replacement borrowing, which was expected to be at higher rates than the existing loans.

This was relevant to Members because it explained why no action had been taken to repay debt early. Although an early repayment might reduce future interest costs, it could also create additional costs now and may not represent best value if the Authority expected to borrow again in the near future.

Investments

Both the Chartered Institute of Public Finance and Accountancy (CIPFA) Code and the Ministry of Housing, Communities and Local Government (MHCLG) investment guidance required the Authority to invest its funds prudently, with primary regard to security and liquidity before yield. During the year, the Authority’s approach continued to be to secure an appropriate balance between risk and return.

To reduce credit risk, the Authority used an account facility with the Debt Management Office (DMO), which was part of His Majesty’s Treasury, as its main counterparty for overnight investments. This provided a highly secure place to hold short-term cash while maintaining immediate access to funds.

The Treasury Management Strategy also allowed investment with other high-quality counterparties, including local authorities. During the year, the Authority maintained positive cash balances throughout, ranging from a high of £60.0 million to a low of £36.7 million. Amounts invested with the DMO ranged from £28.9 million to £6.7 million, with an overnight DMO balance of £9.1 million at 31 March 2026.

Longer-term fixed rate investments could generate higher returns than overnight deposits, but they reduced liquidity and were therefore used selectively. At the year end, fixed investments totalled £30.0 million. During 2025-26, five fixed-term investments matured and seven new investments were placed. £1.5 million of interest was earned on fixed-term investments during the year.

Overnight deposits with the DMO averaged five basis points (0.05%) below Bank Rate. Surplus balances on the Authority’s current account were invested each working day to maximise the return on cash holdings. The average balance invested in this way during the year was £15.6 million, generating interest of £0.6 million.

Total interest earned in 2025-26 was £2.1 million, representing an average return of 4.48%. This compared favourably with the benchmark 7-day Sterling Overnight Index Average (SONIA), which averaged 4.02% over the same period. SONIA was a widely used market benchmark for short-term sterling interest rates. Achieving a return above SONIA indicated that the Authority earned more than a simple overnight market benchmark, mainly because it was able to place some funds in fixed-term deposits at favourable rates while still maintaining sufficient liquidity and operating within the approved risk framework.

All investments were made in accordance with the approved 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 finance team. Where market conditions were considered appropriate, further fixed-term investments would be placed in line with the approved strategy and the Authority’s liquidity requirements.

Prudential Indicators

A range of Prudential Indicators were used to control and monitor the Authority’s treasury management activity. These were effectively the guardrails within which treasury decisions must be taken. They were approved by Members in advance and covered matters such as how much the Authority could borrow, how borrowing was structured, and the limits that applied to investments. Overall, the Prudential Indicators showed that treasury management activity during 2025-26 remained within the limits approved by Members.

In response to a question from County Councillor G Mirfin in relation to the reporting of Treasury Management, the DoCS explained that traditionally Treasury Management would be reported to Resources Committees.

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