Meeting documents

APPENDIX 1

TREASURY MANAGEMENT STRATEGY - 2006/2007

5.1 Treasury Limits for 2006/07 to 2008/09

5.2 Prudential Indicators for 2006/07 - 2008/09

Sector's current interest rate view is that the base rate will:

B7 remain on hold at 4.5% until the end of Q1 2006

B7 fall to 4% by the end of Q4 2006

B7 edge up by 0.25% in Q1, Q2 & Q3 of 2007 to end the year at 4.75%

The risk to this forecast is to the downside in as much as the cuts in rates could occur earlier than our forecast suggests, although this will not necessarily affect the timing of the first upward move in Q1 2007.

5.6 Borrowing Strategy

B7 25-30 year PWLB rate will remain flat at 4.25% until Q4 2006 when it will rise to 4.50% with a further increase to 4.75% in Q2 2007. As the Sector forecast is in 25bp segments there is obviously scope for the rate to move away slightly from 4.25% without affecting this overall forecast.

B7 10 year PWLB rate to dip to 4.25% in the first quarter of 2006, then rise to 4.50% in Q3 2006 reaching 4.75% in Q1 2007 and then remain unchanged until the end of 2007.

B7 5 year gilt yields will follow base rate down and trough by the end of Q1 2006 at 4%. Yields will then rise to 4.25% in Q4 2006, 4.50% in Q1 2007 and to 4.75% in Q2 2007 as the interest rate cycle turns up again.

This forecast indicates, therefore, that the borrowing strategy for 2006/07 should be set to take long dated borrowings in the first half of the year before PWLB rates rise. This applies particularly to the 10 year area where we forecast the rate to fall to 4.25% in Q1 2006. Variable rate borrowing and borrowing in the five year area will also be attractive in the first half of the year while base rate is on a falling trend.

These interest rate expectations provide a variety of options:

B7 that short-term variable rates will be good value compared to long-term rates, and are likely to remain so for potentially at least the next couple of years. Best value will therefore be achieved by borrowing short term at variable rates in order to minimise borrowing costs in the short term or to make short-term savings in order to meet budgetary constraints. (This is the general Sector recommended strategy for 2006/07). A suitable trigger point for considering new fixed rate long term borrowing would be 4.5%.

B7 that the risks in the shorter term variable rates are such, when compared to historically relatively low long term fixed funding, which may be achievable in 2006/07, that the Council will maintain a stable, longer term portfolio by drawing longer term fixed rate funding at a marginally higher rate than short term rates.

Against this background caution will be adopted with the 2006/07 treasury operations. The Treasury Manager will monitor the interest rate market and adopt a pragmatic approach to changing circumstances.

Sensitivity of the Forecast - The main sensitivities of the forecast are likely to be the two scenarios below. The Council officers, in conjunction with the treasury advisers, will continually monitor on a daily basis, both the prevailing interest rates and the market forecasts, adopting the following responses to a change of sentiment:

B7 If it was felt that there was a significant risk of a sharp rise in long and short term rates, perhaps arising from a greater than expected increase in world economic activity, then the portfolio position will be re-appraised with the likely action that fixed rate funding will be drawn whilst interest rates were still relatively cheap.

B7 If it was felt that there was a significant risk of a sharp fall in long and short term rates, due to e.g. growth rates remaining low or weakening, then long term borrowings will be postponed.