Agenda item

Treasury risk management at the Authority is conducted within the framework of the Chartered Institute of Public Finance and Accountancy’s Treasury Management in the Public Services: Code of Practice 2021 Edition (the CIPFA Code) which requires the Authority to approve a treasury management strategy before the start of each financial year. This report fulfils the Authority’s legal obligation under the Local Government Act 2003 to have regard to the CIPFA Code.

The Group Accountant for Financial Accounting & Treasury introduced the report to the Committee and highlighted the following points from it.

·  Treasury risk management at the Authority is conducted within the framework of the Chartered Institute of Public Finance and Accountancy’s Treasury Management in the Public Services: Code of Practice 2021 Edition (the CIPFA Code) which requires the Authority to approve a treasury management strategy before the start of each financial year. This report fulfils the Authority’s legal obligation under the Local Government Act 2003 to have regard to the CIPFA Code.

·  Treasury management is the management of the Authority’s cash flows, borrowing and investments, and the associated risks. The successful identification, monitoring and control of financial risk are therefore central to the Authority’s prudent financial management.

·  Investments held for service or commercial purposes are considered in the Capital and Investment Strategy within the Budget Report which is also included on the agenda for Cabinet & Council for February.

·  Economic background - The Bank of England’s (BoE) Monetary Policy Committee (MPC) held Bank Rate at 4.75% at its December 2024 meeting, having reduced it to that level in November and following a previous 25bp cut from the 5.25% peak at the August MPC meeting.

·  The November quarterly Monetary Policy Report (MPR) expected Gross Domestic Product (GDP) growth to pick up to around 1.75% (four-quarter GDP) in the early period of the BoE’s forecast horizon before falling back. The impact from the Budget pushes GDP higher in 2025 than was expected in the previous MPR, before becoming weaker.

·  ONS figures reported the annual Consumer Price Index (CPI) inflation rate at 2.6% in November 2024, up from 2.3% in the previous month and in line with expectations. Core CPI also rose, but by more than expected, to 3.6% against a forecast of 3.5% and 3.3% in the previous month. The outlook for CPI inflation in the November MPR showed it rising above the MPC’s 2% target from 2024 into 2025 and reaching around 2.75% by the middle of calendar 2025.

·  Credit outlook - Credit Default Swap (CDS) prices have typically followed a general trend downwards during 2024, reflecting a relatively more stable financial period compared to the previous year. Improved credit conditions in 2024 have also led to greater convergence in CDS prices between ringfenced (retail) and non-ringfenced (investment) banking entities again.

·  Interest rate forecast - The Authority’s treasury management adviser Arlingclose expects the Bank of England’s MPC will continue reducing Bank Rate through 2025, taking it to around 3.75% by the end of the 2025/26 financial year. The effect from the Autumn Budget on economic growth and inflation has reduced previous expectations in terms of the pace of rate cuts as well as pushing up the rate at the end of the loosening cycle.

·  Arlingclose expects long-term gilt yields to remain broadly at current levels on average (amid continued volatility), but to end the forecast period modestly lower compared to now. Yields will continue to remain relatively higher than in the past, due to quantitative tightening and significant bond supply.

·  For the purpose of setting the budget, it has been assumed that short term treasury investments will be made at an average rate of 4.00% and long-term strategic investments will yield an average rate of 4.25%. It is forecast that new loans will be borrowed at an average rate of 5.10% during 2025/26.

·  Local context - Council’s position as at 31st December 2024: The Council held £266.95m of borrowing and £43.1m of treasury investments.

·  Liability Benchmark - The liability benchmark is an important tool to help establish whether the Council is likely to be a long-term borrower or long- term investor in the future, and so shape its strategic focus and decision making. The liability benchmark itself represents an estimate of the cumulative amount of external borrowing the Council must hold to fund its current capital and revenue plans while keeping treasury investments at the minimum level required to manage day-to-day cash flow.

·  When we compare actual borrowing to the Liability Benchmark the model anticipates that the Council will be in a under borrowed position between 2025 and 2052. When the Council is considering new long-term borrowing, this funding gap can be used, as a useful guide to the optimal amount and length of borrowing required in order to minimise interest rate and credit risk.

·  Strategy - Short-term interest rates are currently higher than in the recent past, but are expected to fall in the coming years and it is therefore likely to be more cost effective over the medium term to borrow short term loans. The risks of this approach will be managed by keeping the Council’s interest rate exposure within the limit set in the treasury management prudential indicators. By doing so the Council is able to reduce net borrowing costs, over time and overall treasury risk.

·  Under the Markets in Financial Instruments Directive (MiFID) II, the Council has opted up to professional client status with its providers of financial services, including advisers, banks, brokers and fund managers, allowing it access to a greater range of services but without the greater regulatory protections afforded to individuals and small companies. Given the size and range of the Council’s treasury management activities, the Executive Director - Resources believes this to be the most appropriate status.

·  Approved counterparties - The Council may invest its surplus funds with any of the counterparty types in Table 3, subject to the limits shown. The Council will consider other factors including; if a S114 Notice has been issued, if exceptional financial support is requested/granted and the status of the authorities’ statement of accounts.

Councillor Malcolm Treby referred to Table 2 on page 59 of the agenda pack and stated his concern that the net loans requirement was due to rise by over £200m in the next four years. He asked for it to be confirmed how much of the revenue budget would be as a proportion of this and what was driving the increase.

The Head of Financial Management replied that this was linked to the proposed Capital Programme and that there had been an increase in the loan facility to Aequus Group Holding Ltd, the Council’s company that will develop, deliver, own and manage property for both the rental and home owner’s market.

He added that this was linked to their business plan and there were potential big developments in the pipeline which could cost £74m over a five-year period. He said that the revenue impact has been factored into the Medium-Term Plan.

John Barker asked whether further Committee member training could be received from Arlingclose.

The Director of Financial Services, Assurance & Pensions replied that officers have already provided training but would look to put something additional in place with regard to further training if the Committee required but that funding needed to be identified to support this.

The Chair asked if the Head of Financial Management could circulate to the Committee the original training slides from Arlingclose in the meantime.

John Barker referred to page 51 and asked if the risk assessment had been carried out internally.

The Head of Financial Management replied that as part of the process briefings would have been received from advisors relating to economic / credit impact, but this was an internal assessment.

The Chair also referred to page 51 and asked for confirmation that the Council had no counterparty links to Icelandic banks.

The Head of Financial Management replied that the Council had no investment at that time. He added that caution is required when deciding on counterparty selection and that he believed that the Council’s current list is tight.

The Chair asked for an explanation of the decision for the Council to opt up to MiFID II professional status.

The Group Accountant for Financial Accounting & Treasury replied that before MiFID II the Council would have been recognised as a Professional Client and that when it was introduced it would have been given a Customer status. She added that the decision to move up to Professional status would see no change in transparency levels and allows for the Council to receive the same level of support from our treasury management advisors and have access to products including money market funds, pooled funds, treasury bills, bonds and shares.

Councillor Toby Simon commented that he was worried about lending to other Local Authorities and urged officers to act with caution.

John Barker said that formal standards must be in place for any lending between Local Authorities.

The Committee RESOLVED to:

i)  Recommend the actions proposed within the Treasury Management Strategy Statement (Appendix 1) to Council;

ii)  Note the Treasury Management Indicators detailed in Appendix 1.