Agenda item

Report of the Director of Finance & Corporate Services (Treasurer) (RC/23/17) attached.

NB.  Adam Burleton, representing Link Asset Services, the Authority’s Treasury Management advisers, was in attendance for this item of business.

The Committee received for information a report of the Director of Finance & Corporate Services (Treasurer) (RC/23/17) that set out the Authority’s performance relating to the second quarter of 2023-24 (to September 2023) in accordance with the Treasury Management in Public Service Code of Practice (published by the Chartered Institute of Public Finance and Accountancy {CIPFA}) and the CIPFA Prudential Code.  The report set out how this Authority was demonstrating best practice in accordance with these Codes.

During consideration of this item, the following key points were noted:

·        The United Kingdon (UK) had been seeing marginal growth but was at risk of potential, technical recession based on information received from supplier markets on current performance in key areas;

·       Consumer Price Inflation (CPI) had fallen from 6.8% to 6.7% in August 2023 which when coupled with the drop in core CPI inflation to 6.2%, meant that the UK was drawing closer to the position for other G7 countries;

·       interest rates had increased by 25bp in August 2023 taking the bank base rate to 5.25% although this had remained static since then;

·       the Authority had benefitted from the recent rises in interest rates with an increased return on investments at a yield of over 5%.  The benchmark return for quarter 2 of 2023-24 was 5.09% with performance at 5.15% (£0.429m).  The forecast return on investment at year end was now £1.055m;

·       the annual treasury management strategy had continued on a prudent approach, underpinned by investment priorities based on security of capital, liquidity and yield; 

·       none of the Prudential Indicators (affordability limits) had been breached in quarter 2 with external borrowing at 30 September 2023 being £24.217m, forecast to reduce to £23.771 by the end of the financial year with no new borrowing undertaken; and

·       There were no plans to borrow any further funds in the immediate future.

The question was raised as to the likelihood of a technical recession given that the UK had experienced over 2 quarters of no growth.  It was noted that this was in the balance currently.  Around 48% of responses from the market currently indicated no growth but the UK was not in technical recession as yet albeit it was expected.  Employment was expected to rise, however, which should contribute to lower inflation in due course.  Action was being targeted in accordance with monetarist policy to move inflation down to 2% again. 

The Committee had anticipated that interest rates would go down more quickly than set out in the report circulated.  Adam Burleton responded that the 3-year gilt deposit rate was around 4.80% so this anticipated a drop in interest rates.  Things could change quickly and with inflation at 4.7% currently, it was moving in the right direction but wage growth was hiking inflating still and needed to come down.  The issues in the Middle East and Ukraine had all impacted on inflation. 

The Treasurer advised that, when drilling down into the data behind the drop in the level of inflation, whilst the decrease seemed positive on the face of it, the key factors were due to reductions in energy costs which ignored the point that while these costs were higher at this time in 2022-23, households were receiving direct cash support from Government. As such, the actual spending by households was more comparatively despite the reported drop in inflation.  Other factors such as mortgage and food costs, had seen an increase, all of which continue to impact negatively on householders’ income.

Attention was drawn to the potential for future political changes and how this might impact along with the Middle East crisis.  Adam Burleton responded that the price of oil was a major factor in the economy and if supply was cut off, this could impact such as with higher borrowing costs etc.  Public finances were at high levels of national debt (nearly 100% of GDP) so any new government would need to consider its position very carefully.

The Treasurer agreed and indicated that, at this stage, the Service would be insulated from such factors as the budget to be set in February 2024 would be one of fiscal consolidation as the risk of having to borrow to support capital expenditure was high.  The Authority needed to return to making contributions from revenue to capital in future to avoid the high costs of borrowing.  If the Authority did need to borrow in future, it was hoped interest rates would be at a lower rate to make this more viable.