Elected Member Briefing - Quarterly Treasury Update

About this Briefing Note

Report by: Scott Walker, Strategic Lead - Finance and Business Support

Date: 19 February 2025

Subject: Treasury Activity and Compliance to 31 December 2024

Details

Purpose

To update Members on the Treasury Activity and Compliance for the quarter ending 31 December 2024. 

Briefing Information

Economic Background 

The Bank of England's Monetary Policy Committee (MPC) reduced the UK Bank Base Rate from at 5.00% to 4.75% at its meeting on 7 November 2024. It remained the same over the remainder of the quarter as the risk of higher inflation persisted. UK inflation increased from 1.7% for September 2024 to 2.3% for October and 2.6% for November, however it did reduce to 2.5% for December 2024. The largest contributing factor to the increase in inflation was the cost of transport. There was no GDP growth in the last 3 months to 31st December 2024.  

Internationally, Eurozone GDP growth was 0.40% in the quarter ending 30 September 2024, whilst CPI Inflation increased for the third consecutive month to 2.4% in December 2024. In the US, GDP and inflation both increased in November 2024. The US interest rate was reduced in December 2024 to the range of 4.25% to 4.50%. 

The Public Works Loan Board's (PWLB) certainty fixed interest rates for the quarter, which are based on yields on UK gilts, are shown in the graph at Appendix I. There was continued volatility over the quarter following the UK Budget in October 2024 and the outcome of the American Presidential election in November 2024, which increased inflation expectations, with all borrowing rates increasing by the end of the quarter despite the reduction in the Bank Base Rate during the quarter. 

Treasury Activity 

A summary of the Council's treasury position and transactions is shown at Appendix II. The main activities are detailed below.  

In December 2024 there were two new medium-term PWLB fixed Maturity loans undertaken. Both loans were for £10 million, with the first borrowed for a duration of 4 years at 4.88% and the second borrowed for 3 years at 4.91%. Therefore, the Council's total long-term debt increased from £642.7million at an average rate of 2.68% to £662.7 million with an average rate of 2.75%. 

There were six short-term market loans borrowed in the quarter to manage the growing daily cashflow deficits. This position arose as part of the adopted strategy during the period when PWLB rates were high and were still rising, and allowed the Council to defer some of its longer-term borrowing requirement to when it was expected rates would be more favourable. Consequently, £28 million was borrowed for an average of 50 days and at an average rate of 5.04%. At the end of the quarter, £23 million of the short-term borrowing remained outstanding, repayable in January and February 2025. 

Common Good and Charitable Fund balances held on fixed deposit with the Loans Fund decreased from £2.415 million to £2.358 million, with the average interest rate remaining to 4.80%. Funds held from associated bodies and organisations reduced from £3.593 million in the previous quarter to £3.186 million, in line with their own cash flow requirements, whilst the average rate paid on these funds decreased from 4.47% to 4.16% reflecting the reduction in base rate in the quarter.  

Short term cashflow surpluses are invested in a mixture of fixed term deposits, instant access accounts and money market funds. All investments were made in accordance with the approved Investment Strategy and Permitted Investments. 

Fixed Term Deposits 

Cashflow surpluses which arise during the year, and which are not immediately required, are generally invested in fixed term deposits for periods of up to 12 months, or up to 3 years where forecast cashflow requirements allow.  

There were 5 fixed rate deposits made in the quarter (totalling £30 million) at an average interest rate of 5.14% and for an average term of 51 days. This was a significant reduction in comparison to the previous quarter, with fixed deposit activity decreasing in volume and duration due, in the main, to the Council's Capital Programme expenditure requiring shorter cashflow liquidity. Interest rates also reduced in the quarter due to the reduction in the base rate. The fixed deposits undertaken in the quarter will generate £215,481 in interest at their maturity, a reduction from £890,128 in the previous period (6-months). 

Investments for Daily Cashflow Requirements 

Cashflow surpluses which are required for more immediate needs were invested in the Council's instant access and Money Market Funds. The investment transactions in the quarter can be summarised as follows: 

• The daily average amount of such funds reduced to £4.658 million from £6.972 million in the previous six-monthly report.  
• The average interest rate achieved on these accounts over the 6 months reduced from 5.16% to 4.83%. 
• Money Market Funds, which operate on instant access terms, were used extensively over the quarter. The average amount invested reduced from £9.737 million in the previous 6 monthly report to £5.589 million, whilst the average interest rate reduced from 5.16% to 4.85%. 
• The average amount invested via the Council's daily "Sweep" and other daily access facilities was £1.5 million, much of which arose around the Council's Christmas and New Year closedown where there were no external payment facilities available. 
• Interest generated was £194,918 on Money Market Funds activity in the quarter and £10,987 on the other daily access facilities activity. 
• The activity on all these accounts reflected the need to keep an increased level of the available funds for more immediate cashflow purposes over the quarter. The reduction in the level of these funds in this quarter is reflective of the strategy of deferring longer term borrowing and using a higher level of short-term borrowing as and when required. 

The total amount of investments outstanding at 31 December 2024 was £20.275 million compared to £41.456 million at the end of the previous quarter. However, the overall average rate of interest on the investments outstanding increased from 5.09% to 5.24% at the end of the current quarter, which includes fixed deposits with other local authorities at higher rates that mature in January 2025. 

Total income generated on investments undertaken during the quarter totals £421,386 (£1.317 million in the 6-months to 30 September 2024). This measure reflects the total return on the investment activity undertaken in each period and has significantly reduced in the current quarter as a result of fewer deposits being undertaken, and for a shorter duration. 

All of the above investment activities are consistent with the Council's current investment strategy and cashflow requirements. 

Compliance 

For the quarter ending 31 December 2024, there were no breaches in compliance with the Council's approved Treasury Management Policy Statement, Treasury Management Practices (TMP's) or lending limits as detailed in TMP 4 (Approved Instruments, Methods & Techniques). 

Appendix III shows the list of approved counterparties, based on the Council's current lending policy as at January 2025. 

For the quarter ending 31 December 2024 the average closing cleared bank balance was £22,454.88 in credit. This is within the target of less than £50,000 credit and reflects the proactive Treasury Management and cashflow monitoring.