Agenda item

(To receive a report by Karen Tonge, Treasury Manager, which invites the Board to consider a report on the Treasury Management Strategy Statement and Annual Investment Strategy 2022/23 which is due to be considered by the Executive Councillor for Resources, Communications and Commissioning between 14 – 18 March 2022)

Consideration was given to a report by the Treasury Manager, which invited the Board to consider a report on the Treasury Management Strategy Statement and Annual Investment Strategy 2022/23 which was due to be considered by the Leader of the Council (Executive Councillor for Resources, Communications and Commissioning) between 14 and 18 March 2022.

The Board was referred to the table at paragraph 2.1.3 of Appendix 1, which showed the Council’s net treasury portfolio position on 31 December 2021 compared to the start of the year, with associated average percentage costs/returns.

Investment returns were expected to increase in 2022/23 to around 1.25% by the financial year end and liquid investments such as Money Market Funds would see yields improve although there was the potential for a time lag compared to market yield increases. 

Borrowing interest rates had fallen to historically low rates as a result of Covid and Quantitative Easing operations which had increased recently, but remained at relatively low levels with little further increase in yields expected for the following year. Yields in all periods were relatively the same with value to be found at the short end of the curve or the long end. Due to unpredictability rates would remain volatile as markets react to events as they occured. There was still a gap of around 1% to 1.5% between short term rates and long term rates and so any external borrowing undertaken would therefore incur a cost of carry, i.e.) a revenue loss between borrowing costs and investment returns, in the medium term.

Members were reminded that the long term borrowing requirement plans for the Council come from the Council's capital expenditure and financing plans which formed part of the Council Budget each year.

The Treasury Management Strategy had been set for 2022/23 considering the anticipated economic environment and movement of interest rates for the year ahead. The strategies reflected the requirements of the CIPFA Code of Treasury Management, the CIPFA Prudential Code and the MHCLG Guidance on Local Government Investments.

The Director - Link Asset Services was provided with an opportunity to comment on the Council’s treasury management strategy, noting that the proposed internal borrowing position was in line with the liability benchmark and the means of borrowing proposed in the strategy continued to be a cost effective way forward. There was an expectation that higher investment levels would reduce and the Council would invest in cash safely and over time by keeping the portfolio at a shorter duration with more opportunities to obtain better rates throughout course of year. Link Asset Services were working with Officers to make the implementation of the new CIPFA code of practice as easy as possible whilst applying best practice.

The Board supported the recommendations to the Executive Councillor and during their discussion the following items were noted for consideration:

·       The impact of a rising short term rate environment means that as interest rates increase, money market fund rates and call account rates also increase, whilst temporary fixed borrowing which the Council had already taken was at very low rates compared to the current levels. Increasing interest rates also however make it harder to maintain the investment benchmark as there was always a time lag of when investments had not matured yet to replace them with investments at current levels.

·       The risk of inflation was still not fully known but it was expected to peak in April 2022 and then start reducing over the course of this year back to 2% target levels by the end of 2023. There could be several increases in interest rates which could see a rise to around 2%. However, there was a balancing act between the need to reduce inflation while not restricting economic growth and impacting further on businesses and individuals. Higher interest rates would mean better investment returns for the Council so there would be more investment income, but this might be offset by higher external borrowing costs.

·       The Ukraine crisis could result in risky assets such as equities reducing, as money moves into safer, higher quality government bonds and gold. This increased demand in bonds and gilts would lower the yield and hence lower borrowing costs. The crisis could have a negative impact on economic growth which may mean that interest rates would not need to increase. However, there could also be a negative impact on gas for the region which could increase fuel costs even further which would have an impact on inflation. In relation to the liability benchmark, this would result in less long-term borrowing and a lower investment level, with investments held for liquidity purposes only in the long term.

·       CIPFA had reclassified investment into three types which were Treasury Investments, Service Delivery Investments and Commercial Return Investments. The Strategy decision related to the Treasury investments only, which were the investments made from the cash balance of the Council. Service delivery investments taken have a service reason behind the investment and could include loans to a third party to deliver a service. Commercial return investments were made to make a return only with no service delivery benefit behind them. CIPFA’s new code was to tackle the policy and practices of the non-treasury and commercial investments that had arisen over the past few years.

·       Training expectations for those involved in treasury management was currently set out in the Strategy. The new CIPFA code introduces a new requirement for a knowledge and skills framework for everyone involved in treasury management setting out what skills and knowledge each participant in treasury management should have and identify any training requirements required to provide that. This would be proportionate to the size and complexity of the council as each council delivered treasury management differently and it would be for each council to determine what was suitable. This framework would be developed over the forthcoming financial year.

·       With regards to the pension fund pooling arrangements, an agreement was put in place in April 2010 which set out how it would be governed and operate to ensure there was protection for both sides.

RESOLVED:

1.      That the recommendations, as set out in the report, be supported;

2.      That a summary of the comments made, as above, be passed on to the Executive Councillor as part of his consideration of this item.