Agenda item

Treasury Management Report


The Leader introduced the compliance report to confirm whether Treasury activities accorded with the Treasury Strategy previously considered and set by Members.


Its purpose was to inform Cabinet of treasury activities undertaken during the period from April 2022 to end of September 2022 and confirm, (other than interest rate volatility exposure), that all treasury and prudential indicators continued to be adhered to.


The report was presented to Governance and Audit Committee and endorsed by them for onward consideration by us in Cabinet, and ultimately Council.


The report presented the following information:


·              Reminder of treasury strategy agreed

·              Details of borrowing and investment activity

·              Wider economic considerations eg pandemic, economic climate

·              An update to the International Treasury code on commercial investment funding

·              And concluded with an examination of activity against performance confirming compliance


In relation to the borrowing aspect, the report highlighted, as at 30 September 2022, that borrowing was £140.6m, a decrease of £1.5m in comparison to 2021-22 outturn levels.


This decrease was predominantly caused by our Equal Instalments of Principal (EIP) loans, which paid back principal over the life of the loan (and so incurs less interest costs), as an alternative to our maturity loans where the principal was repaid on the final day of the loan.


Officers advised Cabinet that as interest rates increased, there was a likelihood that our LOBO (Lender offer borrower offer) loans would be called in.  This meant that the lenders asked to amend the rates of these facilities upwards, the borrower (the Council) either accepted that increased rate or redeemed the debt.  No such recall requests were made in first half of 2022-23, but should they be made in second half of the year, unless there was a sufficient incentive to accept the change in interest rate, officers were anticipating they would be replaced with more traditional borrowing in due course.


Current capital expenditure forecasts involved a degree of slippage, so it was not expected there would be a need to undertake further long-term borrowing this financial year, although that did not preclude external borrowing being considered if the situation was advantageous in acting as a hedge to manage interest rate risks recognising the Council still had a longer term borrowing necessity. Any such decision to do this would be made in line with advice from the Council’s treasury advisors and only where there was a clear financial benefit in doing so.


With regard to investments, the level of investments at 30 September was £50m, and decreased by £8.2m since outturn 2021-22, as we used up such resourcing as a more cost effective alternate to arranging new external borrowing. 


It was anticipated that investment levels would continue to reduce during 2022/23 as an alternative to borrowing until we ultimately reached a minimum balance of £10m, which would remain invested for compliance with MiFIDII.  (Markets in Financial Instruments and Derivatives Directive). 


Market expectations were for interest rates to start to revert to more traditional levels in the last quarter of 2022-23, and so it was sensible to avoid making any long-term borrowing decisions in the short term whilst rates were perceived to be higher than likely next year.


This approach was a cornerstone of effective internal borrowing, and even in an environment of increasing interest rates, the cost of new borrowing was still more expensive than any increasing returns on investments, so it continued to make sense to use our existing surplus cash balances as an alternative to arranging new borrowing.


The final aspect for Cabinet to consider were the Prudential Indicators. The Authority measures and managed its exposures to treasury management risks using various indicators which could be found in Appendix B.  The report confirmed the Council continued to comply with the Prudential Indicators set for 2022/23, other than one particular metric designed to highlight the risk to levels of interest receivable from investments should interest rates collectively fall by 1%. 


Officers explained in the report that the purpose of that particular indicator was to highlight how much the Council budgeted income levels would be adversely affected by any drop in interest rates.  The deviation was more significant than the target due to an increased level of investments being made, and also created a false impression as interest rates were experiencing a rising trend currently.  But should those interest rates revert to historic levels (which was not anticipated in the short term), there would still be no risk to the Council’s financed in this financial year, as the current income targeted for interest receivable was being exceeded. Officers were aware that the risk would need to be closely monitored heading into 2023/24, if both investment levels and interest rates were to reduce.


Comments of Cabinet Members:


·        Councillor Batrouni referred to recent news that the American inflation rate was much lower than the markets were predicting, leading to speculation of the easing of hiking interest rates and possibly reversing course.  In relation to the strategy of short-term borrowing it seemed likely that there may be a turn in 2023 given the scale of possible recession fears. It would therefore be prudent to maximise internal borrowing now and look to long-term borrowing as Britain tried to boost the economy.




Cabinet noted the report on treasury management activities during the first half year period of 2022-23 and provided comments on the report for inclusion in the subsequent report to Council.

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