Appendix 18

TREASURY MANAGEMENT POLICY AND STRATEGY 2022/23

CONTENTS

1. INTRODUCTION

1.1. Background

1.2. Reporting Requirements

1.3. Treasury Management Strategy for 2022/23

1.4. Treasury Management Policy Statement

1.5. Current Portfolio Position

2. BORROWING STRATEGY

2.1. Borrowing Strategy for 2022/23

2.2. Policy for Borrowing in Advance of Need

2.3. Debt Rescheduling

2.4. Interest Rate Risk & Continual Review

3. MINIMUM REVENUE PROVISION POLICY STATEMENT

4. ANNUAL INVESTMENT STRATEGY

4.1. Annual Investment Strategy for 2022/23

4.2. Investment Policy – Management of Risk

4.3. Sovereign Credit Ratings

4.4. Creditworthiness Policy

5. OTHER TREASURY ISSUES

5.1. Banking Services

5.2. Training

5.3. Policy on the use of External Service Providers

5.4. Lending to Third Parties

5.5. Updates to Accounting Requirements

ANNEXES:

Annex A          Counterparty List

Annex B          Economic Background & Prospect for Interest Rates

Annex C          Prudential & Treasury Indicators

Annex D          Scheme of Delegation

Annex E          Investment Product Glossary                                          

1. INTRODUCTION

1.1       Background

The Council is required to operate a balanced budget, which broadly means that cash raised during the year will meet cash expenditure. Part of the treasury management operation is to ensure that this cash flow is adequately planned, with cash being available when it is needed.  Surplus monies are invested in counterparties or instruments commensurate with the Council’s risk appetite, providing adequate liquidity initially before considering investment return.

The second main function of the treasury management service is the funding of the Council’s capital plans.  These capital plans provide a guide to the borrowing need of the Council, essentially the longer-term cash flow planning, to ensure that the Council can meet its capital spending obligations. This management of longer-term cash may involve arranging long or short-term loans or using longer-term cash flow surpluses. On occasion, when it is prudent and economic, any debt previously drawn may be restructured to meet Council risk or cost objectives.

The contribution the treasury management function makes to the authority is critical, as the balance of debt and investment operations ensure liquidity or the ability to meet spending commitments as they fall due, either on day-to-day revenue or for larger capital projects.  The treasury operations will see a balance of the interest costs of debt and the investment income arising from cash deposits affecting the available budget.  Since cash balances generally result from reserves and balances, it is paramount to ensure adequate security of the sums invested, as a loss of principal will in effect result in a loss to the General Fund Balance.

CIPFA defines treasury management as:

“The management of the local authority’s borrowing, investments and cash flows, its banking, money market and capital market transactions; the effective control of the risks associated with those activities; and the pursuit of optimum performance consistent with those risks.”

1.2       Reporting Requirements

1.2.1    Capital Strategy

The CIPFA 2017 Prudential and Treasury Management Codes require all local authorities to prepare a capital strategy report, to provide the following:

· a high-level long term overview of how capital expenditure, capital financing and treasury management activity contribute to the provision of services

· an overview of how the associated risk is managed

· the implications for future financial sustainability

The aim of the capital strategy is to ensure that all elected members on the full Council fully understand the overall long-term policy objectives and resulting capital strategy requirements, governance procedures and risk appetite.

This capital strategy is reported separately from the Treasury Management Strategy Statement; non-treasury investments will be reported through the former. This ensures the separation of the core treasury function under security, liquidity and yield principles, and the policy and commercialism investments usually driven by expenditure on an asset.

1.2.2    Treasury Management reporting

The Council is currently required to receive and approve, as a minimum, three main treasury reports each year, which incorporate a variety of policies, estimates and actuals. 

a. Prudential and treasury indicators and treasury strategy (this report) - The first, and most important report is forward looking and covers:

· the capital plans, (including prudential indicators);

· a minimum revenue provision (MRP) policy, (how residual capital expenditure is charged to revenue over time);

· the treasury management strategy, (how the investments and borrowings are to be organised), including treasury indicators; and

· an investment strategy, (the parameters on how investments are to be managed).

b. A mid-year treasury management report – This is primarily a progress report and will update members on the capital position, amending prudential indicators as necessary, and whether any policies require revision.

c. An annual treasury report – This is a backward looking review document and provides details of a selection of actual prudential and treasury indicators and actual treasury operations compared to the estimates within the strategy.

This Council delegates responsibility for implementation and monitoring treasury management to Cabinet and responsibility for the execution and administration of treasury management decisions to the Section 151 Officer. Cabinet therefore receives the Mid Year and Annual treasury reports in December each year.

The above reports are required to be adequately scrutinised before being recommended to the Council.  This role is undertaken by the Audit Committee.

1.3       Treasury Management Strategy for 2022/23

The strategy for 2022/23 covers two main areas:

Capital issues

• the capital expenditure plans (section 2) and the associated prudential indicators (Annex C);
• the minimum revenue provision (MRP) policy (Section 3).

Treasury management issues

• the current treasury position (section 1.5);
• treasury indicators which limit the treasury risk and activities of the Council (Annex C);
• prospects for interest rates (Annex B);
• the borrowing strategy (section 2);
• policy on borrowing in advance of need (section 2.2);
• debt rescheduling (section 2.3);
• the investment strategy (section 4);
• creditworthiness policy (section 4.4); and
• the policy on use of external service provider (section 5.3).

These elements cover the requirements of the Local Government Act 2003, the CIPFA Prudential Code, DLUHC MRP Guidance, the CIPFA Treasury Management Code and DLUHC Investment Guidance.

1.4       Treasury Management Policy Statement

The policies and objectives of the Council’s treasury management activities are as follows:

i) This Council defines its treasury management activities as:

‘The management of the authority’s investments and cash flows, its banking, money market and capital market transactions; the effective control of the risks associated with those activities; and the pursuit of optimum performance consistent with those risks’.

ii) This Council regards the successful identification, monitoring and control of risk to be the prime criteria by which the effectiveness of its treasury management activities will be measured. Accordingly, the analysis and reporting of treasury management activities will focus on their risk implications for the Council, and any financial instruments entered into to manage these risks.

iii) This Council acknowledges that effective treasury management will provide support towards the achievement of its business and service objectives. It is therefore committed to the principles of achieving value for money in treasury management, and to employing suitable comprehensive performance management techniques, within the context of effective risk management.

1.5       Current Treasury Position

A summary of the Council’s borrowing & investment portfolios as at 30^th November 2021 and forecast at the end of the financial year is shown in Table 1 below:

Table 1	Actual at 30 November 2021			Forecast to 31 March 2022
	£’000	% of portfolio	Average Rate	£’000	% of portfolio	Average Rate
Investments
Banks	174,000	55%	0.26%	160,000	55%	0.30%
Local Authorities	80,350	25%	0.66%	70,000	24%	0.60%
Money Market Funds	59,650	18%	0.04%	55,000	19%	0.10%
CCLA Pooled Property Fund	5,000	2%	3.80%	5,000	2%	3.75%
Total Investments	319,000	100%	0.38%	290,000	100%	0.40%
Borrowing
PWLB loans	222,000	95%	4.67%	220,000	95%	4.65%
Market loans	12,900	5%	4.00%	12,900	5%	4.00%
Total external Borrowing	234,900	100%	4.64%	232,900	100%	4.62%

2. BORROWING STRATEGY

The capital expenditure plans of the Council are set out in the Capital Strategy Report being considered by Full Council on 8 February 2022. The treasury management function ensures that the Council’s cash is organised in accordance with the relevant professional codes so that sufficient cash is available to meet the capital expenditure plans.

Any capital investment that is not funded from these new and/or existing resources (e.g. capital grants, receipts from asset sales, revenue contributions or earmarked reserves) increases the Council’s need to borrow. However, external borrowing does not have to take place immediately to finance its related capital expenditure: the Council can utilise cash being held for other purposes (such as earmarked reserves and working capital balances) to temporarily defer the need for external borrowing. This is known as ‘internal borrowing’.

The Council’s primary objective is to strike an appropriate balance between securing cost certainty, securing low interest rates. The Council’s cumulative need to borrow is known as the Capital Financing Requirement (CFR). The CFR and the actual level of external borrowing will differ according to decisions made to react to expected changes in interest rates and the prevailing economic environment. Where a decision to defer borrowing (or internally borrow) is made, the Council will be under borrowed. Where a decision to borrow in advance of need to secure cost certainty, the Council will be overborrowed.

On 25 November 2020 the Chancellor announced the conclusion to the review of margins over gilt yields for PWLB rates; the standard and certainty margins were reduced by 1% but a prohibition was introduced to deny access to PWLB borrowing for any local authority which intended to purchase assets primarily for yield in its three year capital programme. The reduction in future borrowing costs will be factored into the funding of the capital programme which contains no such assets for yield purchases.

While this authority will not be able to avoid borrowing to finance new capital expenditure, to replace maturing debt and the rundown of reserves, there will be a cost of carry, (the difference between higher borrowing costs and lower investment returns), to any new borrowing that causes a temporary increase in cash balances as this position will, most likely, incur a revenue cost.

There is £32m expected to be funded via borrowing in the 2021/22 Capital Programme. No new external borrowing is expected to be undertaken to fund this, and this will be funded through cash balances. This is expected to increase the Council’s under-borrowed position compared to its CFR from £32m at 31 March 2022 to £40m by 31 March 2023.

2.1       Borrowing Strategy for 2022/23

The Council’s Capital Programme 2022/23 to 2024/25 forecasts £258m of capital investment over the next three years with £132m met from existing or new resources. The increase in the Council’s borrowing need over this period is therefore £126m as shown in Table 2 below.

2021/22 Projected	Table 2	2022/23 Estimate	2023/24 Estimate	2024/25 Estimate	Total
£m		£m	£m	£m	£m
88	Capital Expenditure	102	77	79	258
(56)	Financed by: New & existing resources	(62)	(39)	(31)	(132)
32	Borrowing Need	40	38	48	126

Table 3 below shows the actual expected external borrowing against the capital financing requirement, identifying any under or over borrowing.

2021/22	Table 3	2022/23 Estimate	2023/24 Estimate	2024/25 Estimate
Estimate
£m		£m	£m	£m
237	External Debt at 1 April	233	263	292
(4)	Expected change in Debt	30	29	38
233	External Debt at 31 March	263	292	330
255	CFR* at 1 April	280	313	342
32	Borrowing need (Table 2)	40	38	48
(7)	MRP	(7)	(7)	(10)
280	CFR* at 31 March	313	344	380
47	Under / (Over) borrowing	50	52	50

*CFR in Table 3 is the underlying need to borrow and excludes PFI and lease arrangements, which are included in the CFR figure in the Prudential Indicators in Annex C

Table 2 demonstrates that the Council has a borrowing need of £126m over the next three years.  The strategy will initially focus on meeting this borrowing need from internal borrowing; avoiding external borrowing by utilising the Council’s own surplus funds. Modelling of the movement of reserves and the Council’s capital expenditure plans demonstrates that the Council’s long term reserves can support a level of approximately £50m of internal borrowing. This will mitigate the increase in the cost of borrowing and reduce counterparty risk within the Council’s investment portfolio by reducing the portfolio size.

There will remain a cost of carry (the difference between borrowing costs and investment rates) to any new long term borrowing that causes a temporary increase in cash balances which will, most likely, lead to a cost to revenue.

Therefore, the internal borrowing position needs to be carefully and continually reviewed to avoid incurring higher borrowing costs in the future at a time when the authority may not be able to avoid new borrowing to finance capital expenditure or refinance maturing debt.

2.2       Policy on Borrowing in Advance of Need

The Council will not borrow purely in order to profit from investment of extra sums borrowed. Any decision to borrow in advance will be within approved Capital Financing Requirement estimates and will be considered carefully to ensure that value for money can be demonstrated and that the Council can ensure the security of such funds.  Risks associated with any borrowing in advance activity will be subject to prior appraisal and subsequent reporting.

2.3       Debt Rescheduling

Officers continue to regularly review opportunities for debt rescheduling, but there has been a considerable widening of the difference between new borrowing and repayment rates, which has resulted in much fewer opportunities to realise any savings or benefits from rescheduling PWLB debt. 

The reasons for any rescheduling to take place will include:

§ the generation of cash savings and / or discounted cash flow savings;

§ helping to fulfil the treasury strategy;

§ enhance the balance of the portfolio (amend the maturity profile and/or the balance of volatility).

The strategy is to continue to seek opportunity to reduce the overall level of Council’s debt where prudent to do so, thus providing in future years cost reduction in terms of lower debt repayments costs, and potential for making savings by running down investment balances to repay debt prematurely as short term rates on investments are likely to be lower than rates paid on current debt.  All rescheduling will be agreed by the Chief Finance Officer.

2.4       Interest Rate Risk & Continual Review

The total borrowing need in Table 2, as well as the debt at risk of maturity shown in Table 4 is the extent to which the Council is subject to interest rate risk.

Table 4	2022/23	2023/24	2024/25
	£m	£m	£m
Maturing Debt	6	4	5
Debt Subject to early repayments options	6	6	6
Total debt at risk of maturity	12	10	11

Officers continue to review the need to borrow taking into consideration the potential increases in borrrowing costs, the need to finance new capital expenditure, refinancing maturing debt, and the cost of carry that might incur a revenue loss between borrowing costs and investment returns.

Against this background and the risks within the economic forecast, caution will be adopted with the 2022/23 treasury operations.  The Chief Finance Officer will continue to monitor interest rates in financial markets and adopt a pragmatic approach to changing circumstances:

§ if it was felt that there was a significant risk of a sharp fall in long and short term rates (e.g. due to a marked increase of risks around relapse into recession or of risks of deflation), then long term borrowings will be postponed, and potential rescheduling from fixed rate funding into short term borrowing will be considered.

§ if it was felt that there was a significant risk of a much sharper rise in long and short term rates than that currently forecast, perhaps arising from an acceleration in the start date and in the rate of increase in central rates in the USA and UK, an increase in world economic activity or a sudden increase in inflation risks, then the portfolio position will be re-appraised with the likely action that fixed rate funding will be drawn whilst interest rates are still lower than they will be in the next few years.

3. MINIMUM REVENUE PROVISION POLICY STATEMENT

The Council is required to pay off an element of the accumulated General Fund capital spend each year (the Capital Financing Requirement - CFR) through a revenue charge (the Minimum Revenue Provision - MRP). The Department for Levelling Up, Housing and Communities (DLUHC) regulations require the full Council to approve an MRP Statement in advance of each year. A variety of options are available to Councils, so long as the principle of any option selected ensures a prudent provision to redeem its debt liability over a period which is commensurate with that over which the capital expenditure is estimated to provide benefits (i.e. estimated useful life of the asset being financed).

The policy below reflects a change in the policy as approved and implemented for 2018/19 onwards; The Council is recommended to approve the following MRP Statement for 2022/23 onwards:

For borrowing incurred before 1 April 2008, the MRP policy will be:

· Annuity basis over a maximum of 40 years.

From borrowing incurred after 1 April 2008, the MRP policy will be:

· Asset Life Method (annuity method) – MRP will be based on the estimated life of the assets, in accordance with the proposed regulations.  A maximum useful economic life of 50 years for land and 40 years for other assets.  This option will also be applied for any expenditure capitalised under a capitalisation directive.

For PFI schemes, leases and closed landfill sites that come onto the Balance Sheet, the MRP policy will be:

· Asset Life Method (annuity method) - The MRP will be calculated according to the flow of benefits from the asset, and where the principal repayments increase over the life of the asset.  Any related MRP will be equivalent to the “capital repayment element” of the annual charge payable.

There is the option to charge more than the prudent provision of MRP each year through a Voluntary Revenue Provision (VRP).

For loans to third parties that are being used to fund expenditure that is classed as capital in nature, the policy will be to charge an MRP over the life of the loan. 

In view of the variety of different types of capital expenditure incurred by the Council, which is not in all cases capable of being related to an individual asset, asset lives will be assessed on a basis which most reasonably reflects the anticipated period of benefit that arises from the expenditure. Also, whatever type of expenditure is involved, it will be grouped together in a manner which reflects the nature of the main component of expenditure. This approach also allows the Council to defer the introduction of an MRP charge for new capital projects/land purchases until the year after the new asset becomes operational rather than in the year borrowing is required to finance the capital spending.

4. ANNUAL INVESTMENT STRATEGY

The DLUHC and CIPFA have extended the meaning of ‘investments’ to include both financial and non-financial investments. This report deals with financial investments. Non-financial investments are covered in the Capital Strategy.

The Council’s investment policy has regard to the following:

· DLUHC’s Guidance on Local Government Investments (the “Guidance”)

· CIPFA Treasury Management in Public Services Code of Practice and Cross Sectoral Guidance Notes 2017 (the “Code”)

· CIPFA Treasury Management Guidance Notes 2018

The Council’s investment priorities will be the security of capital first, portfolio liquidity second and then yield (return).

  4.1     Annual Investment Strategy for 2022/23

Investments will be made with reference to the core balance and cash flow requirements and the outlook for interest rates.

Bank Rate is likely to remain low for a considerable period with moderate increases forecasted over the next 24 months. Link Asset Services (LAS) forecast assumes that investment earnings from money market-related instruments will be below 1.00% for the foreseeable future.  LAS’s forecast for Bank Rate (and therefore the rate earned on liquid investments) at each financial year end (i.e. March) are:

2021/22	2022/23	2023/24	2024/25
0.25%	0.75%	1.00%	1.25%

LAS’s view on the prospect for interest rates, including their forecast for short term investment rates is appended at Annex B.

Following consultation, changes to the strategy were made from 2018/19 to broaden the risk profile by reducing liquidity and to include some suitable, alternative investment products that are held for the medium (2-5 years) to longer term (5 years+).  These products can generate better overall returns but there is a higher risk of volatility of performance so a longer term commitment is required.

During 2018/19, £5m was invested in the CCLA Pooled Property Fund which was the first step into utilising the new instruments within the revised strategy. Further investment in property funds was paused during 2020/21 due to a combination of factors. The main consideration, was the uncertain environment of the UK property market coming out of the COVID pandemic. It is therefore not an appropriate time to increase investment balances with property funds.

An options appraisal process was undertaken during 2019/20 to ascertain a) an appropriate level of cash balances that can be invested into longer term instruments and b) which other instruments are most appropriate to expand and diversify the Council’s investment portfolio. This work has been also paused during 2021/22 as a result of the economic impact and market uncertainty that remains as a result of the COVID pandemic.

In 2021/22 two fixed term bank deposits totalling £30m were placed with Standard Chartered that are ringfenced within a sustainable lending ESG framework. These investments are assigned to sustainable assets with the aim of addressing the UN sustainable development goals. The offering fulfils the key principle of security, liquidity and yield and is consistent with the banks current other fixed term deposit rates.      

Table 5below summarises the changes since the approved 2017/18 strategy. No further changes are proposed for 2022/23. Each of the new investment products included are described in more detail in Annex E. The inclusion of an investment product category in the strategy does not automatically result in investments being placed – investments will only be placed following a due diligence procedure as described above.

Table 5 - Investment options	2017/18	2018/19	2019/20	2020/21	2021/22	2022/23
Money Market Funds (Including LVNAV)	ü	ü	ü	ü	ü	ü
Bank Notice Accounts	ü	ü	ü	ü	ü	ü
Fixed Term Bank Deposits	ü	ü	ü	ü	ü	ü
UK Local Authorities	ü	ü	ü	ü	ü	ü
Enhanced Money Market Funds (VNAV)	ü	ü	ü	ü	ü	ü
Building Societies	û	ü	ü	ü	ü	ü
Pooled Property Funds	û	ü	ü	ü	ü	ü
Corporate Bond Funds (Including Short Dated Bond Funds)	û	ü	ü	ü	ü	ü
Multi Asset Funds	û	ü	ü	ü	ü	ü
Equity Funds	û	û	ü	ü	ü	ü

The primary principle governing the Council’s investment criteria is the security of its investments, although the return on the investment is also a key consideration.  After this main principle, the Council will ensure that:

§ It maintains a policy covering both the categories of investment types it will invest in and the criteria for choosing investment counterparties with adequate security, and monitoring their security;

§ It has sufficient liquidity in its investments;

§ It receives a yield that is aligned with the level of security and liquidity of its investments;

§ Where possible, it actively seeks to support Environmental, Social and Governance (ESG) investment products and institutions that meet all of the above requirements.

The preservation of capital is the Council’s principal and overriding priority.

4.2       Investment Policy – Management of risk

Treasury management risks and how risks are managed and mitigated are identified in the Council’s Treasury Management Practices and related procedures, details of which are held within the Council’s Treasury Management Team.  The main risks to the Council’s treasury activities are:

§ liquidity risk (inadequate cash resources);

§ market or interest rate risk (fluctuations in interest rate levels and thereby in the value of investments);

§ inflation risks (exposure to inflation);

§ credit and counterparty risk (security of investments);

§ refinancing risks (impact of debt maturing in future years); and

§ legal and regulatory risk (i.e. non-compliance with statutory and regulatory requirements, risk of fraud).

The guidance from the DLUHC and CIPFA place a high priority on the management of risk. This authority has adopted a prudent approach to managing risk and defines its risk appetite by the following means: -

i) Minimum acceptable credit criteria are applied in order to generate a list of highly creditworthy counterparties.  This also enables diversification and thus avoidance of concentration risk. The key ratings used to monitor counterparties are the short term and long-term ratings.

ii) Other information: ratings will not be the sole determinant of the quality of an institution; it is important to continually assess and monitor the financial sector on both a micro and macro basis and in relation to the economic and political environments in which institutions operate. The assessment will also take account of information that reflects the opinion of the markets. To achieve this consideration the Council will engage with its advisors to maintain a monitor on market pricing such as “credit default swaps” and overlay that information on top of the credit ratings.

iii) Other information sources used will include the financial press, share price and other such information pertaining to the banking sector in order to establish the most robust scrutiny process on the suitability of potential investment counterparties.

iv) This authority has defined the list of types of investment instruments that the treasury management team are authorised to use.

a. Specified investments are those with a high level of credit quality and subject to a maturity limit of one year. The limits and permitted instruments for specified investments are listed within Table 7.

b. Non-specified investments are those with less high credit quality, may be for periods in excess of one year, and/or are more complex instruments which require greater consideration by members and officers before being authorised for use. The limits and permitted instruments for non-specified investments are listed within Table 8.

v) Lending limits (amounts and maturity) for each counterparty will be set through applying the credit criteria matrix (within Table 7).

vi) This authority will set a limit for the amount of its investments which are invested for longer than 365 days, detailed in the Treasury Indicators in Annex C.

vii) With  the exception of the UK, investments will only be placed with counterparties from countries with a specified minimum sovereign rating of AA+ (see paragraph 4.3).

viii) This authority has engaged external consultants, (see paragraph 5.3), to provide expert advice on how to optimise an appropriate balance of security, liquidity and yield, given the risk appetite of this authority in the context of the expected level of cash balances and need for liquidity throughout the year.

ix) All investments will be denominated in sterling.

x) As a result of the change in accounting standards for 2018/19 under IFRS 9, this authority will consider the implications of investment instruments which could result in an adverse movement in the value of the amount invested and resultant charges at the end of the year to the General Fund. In November 2018, DLUHC, concluded a consultation for a temporary override to allow English local authorities time to adjust their portfolio of all pooled investments by announcing a statutory override to delay implementation of IFRS 9 for five years commencing from 1.4.18.

4.3       Sovereign Credit Ratings

For 2022/23 it is recommended to maintain the policy of lending to sovereign nations and their banks which hold either a AAA or AA+ rating, with the exception of the UK which is currently rated AA- by two of the three rating agencies (Aa2 Moody’s). Maximum investment limits and duration periods will remain the same as in the previous strategy at £60 million and one year respectively.  The list of countries that qualify using this credit criteria (as at the date of this report) are shown below:

AAA    Australia, Denmark, Germany, Netherlands, Singapore, Sweden and Switzerland

AA+    Canada

AA-     UK

4.4       Creditworthiness Policy

The Council applies thecreditworthiness service provided by the Link Group. This service employs a sophisticated modelling approach utilising credit ratings from the three main credit rating agencies which is then supplemented with the following overlays:

· credit watches and credit outlooks from credit rating agencies;

· credit default swap (CDS) spreads to give early warning of likely changes in credit ratings;

· sovereign ratings to select counterparties from only the most creditworthy countries.

This weighted scoring system then produces an end product of a series of colour coded bands which indicate the relative creditworthiness of counterparties.  These colour codes are used by the Council to determine the suggested duration for investments.

The Council (in addition to other due diligence consideration) will use counterparties within the following durational bands provided they have a minimum AA+ soverign rating from three rating agencies:

Y	P	B	O	R	G	N/C
Up to 5yrs	Up to 2yrs	Up to 1yr	Up to 1yrs	Up to 6 months	Up to 100 days	Not to be used

Typically the minimum credit ratings criteria the Council use will be a Short Term rating (Fitch or equivalents) of   F1 and a Long Term rating of A-. There may be occasions when the counterparty ratings from one rating agency are marginally lower than these ratings but may still be used.  In these instances consideration will be given to the whole range of ratings available, or other topical market information, to support their use.

The primary principle governing the Council’s investment criteria is the security of its investments, although the return on the investment is also a key consideration.  After this main principle, the Council will ensure that:

§ It maintains a policy covering both the categories of investment types it will invest in and the criteria for choosing investment counterparties with adequate security, and monitoring their security;

§ It has sufficient liquidity in its investments. 

All credit ratings are monitored daily. The Council is alerted to changes to ratings of all three agencies through its use of the LAS credit worthiness service.  If a downgrade results in the counterparty or investment scheme no longer meeting the Council’s minimum criteria, its further use as a new investment will be withdrawn immediately.

In addition to the use of credit ratings, the Council is advised of information re movements in Credit Default Swap against the iTraxx benchmark and other market data on a weekly basis. Extreme market movements may result in downgrade of an institution or removal from the Council’s lending list.  The counterparties in which the Council will invest its cash surpluses is based on officer’s assessment of investment security, risk factors, market intelligence, a diverse but manageable portfolio and their participation in the local authority market.

Table 7 below summarises the types of specified investment counterparties available to the Council, and the maximum amount and maturity periods placed on each of these.  A full list of the Council’s counterparties and the current limits for 2021/22 are appended at Annex A.

Criteria for Specified Investments

Table 7	Country/ Domicile	Instrument	Min. Credit Criteria/LAS colour band	Max. Amount	Max. maturity period
Debt Management and Deposit Facilities (DMADF)	UK	Term Deposits (TDs)	N/A	unlimited	12 Months
Government Treasury bills	UK	TDs	UK Sovereign Rating	unlimited	12 Months
UK Local Authorities**	UK	TDs	UK Sovereign Rating	£60m	12 Months
Banks – part nationalised	UK	§ TDs § Deposits on Notice § Certificates of Deposit (CDs)	N/A	£60m	12 Months
Banks	UK	§ TDs § Deposits on Notice § CDs	Blue	£60m	12 Months
			Orange	£60m	12 Months
			Red	£60m	6 Months
			Green	£60m	100 Days
Building Societies	UK	§ TDs § Deposits on Notice § CDs	Blue	£60m	12 Months
			Orange	£60m	12 Months
			Red	£60m	6 Months
			Green	£60m	100 Days
Individual Money Market Funds (MMF) CNAV and LVNAV	UK/Ireland/ EU domiciled	AAA Rated Money Market Fund Rating	N/A	£60m	Liqiuid
VNAV MMF’s and Ultra Short Dated Bond Funds	UK/Ireland/EU domiciled	AAA Rated Bond Fund Fund Rating	N/A	£60m	Liquid
Banks – Non-UK	Those with sovereign rating of at least AA+*	§ TDs § Deposits on Notice § CDs	Blue	£60m	12 Months
			Orange	£60m	12 Months
			Red	£60m	6 Months
			Green	£60m	100 Days

*See Paragraph 4.3 for full list of countries that meet these criteria

** Local Authorities appear on both Specified and Non-specified investment list – an investment with a LA for up to a year is Specified, and between 1-2 years is Non-specified. The maximum amount that can be lent to any single Local Authority is £60m across both specified and Unspecified Investments

Non-Specified investments are any other types of investment that are not defined as specified. The identification and rationale supporting the selection of these other investments and the maximum limits to be applied are set out in Table 8 below:

Table 8	Minimum credit criteria	Maximum investments	Period
UK Local Authorities**	Government Backed	£60m	2 years
Corporate Bond Fund(s)	Investment Grade	£30m	2 - 5 years
Pooled Property Fund(s)	N/A	£30m	5+ years
Mixed Asset Fund(s)	N/A	£30m	2 - 5 years
Short Dated Bond Fund(s)	N/A	£30m	2 – 5 years

** Local Authorities appear on both Specified and Non-specified investment list – an investment with a LA for up to a year is Specified, and between 1-2 years is Non-specified. The maximum amount that can be lent to any single Local Authority is £60m across both specified and Unspecified Investments

The maximum amount that can be invested will be monitored in relation to the Council’s surplus monies and the level of reserves. The approved counterparty list will be maintained by referring to an up-to-date credit rating agency reports, and the Council will liaise regularly with brokers for updates. Where Externally Managed Funds are not rated, a selection process will evaluate relative risks & returns. Security of the council’s money and fund volatility will be key measures of suitability. Counterparties may be added to or removed from the list only with the approval of the Chief Finance Officer. A full list of the Council’s counterparties and the current limits for 2022/23 are appended at Annex A.

5. OTHER TREASURY ISSUES

5.1       Banking Services

NatWest, which is part Government owned, currently provides banking services for the Council.

5.2       Training

The CIPFA Code requires the responsible officer to ensure that members with responsibility for treasury management receive adequate training in treasury management.  This especially applies to members responsible for scrutiny.  Training was last provided to Audit Committee members on 19 November 2021 and further training will be arranged as required. 

The training needs of treasury management officers are periodically reviewed and training arranged as required.

5.3       Policy on the use of External Service Providers

The Council uses Link Asset Services as its external treasury management advisors.

The Council recognises that responsibility for treasury management decisions remains with the Council at all times and will ensure that undue reliance is not placed upon our external service providers. It also recognises that there is value in employing external providers of treasury management services in order to acquire access to specialist skills and resources. The Council will ensure that the terms of their appointment and the methods by which their value will be assessed are properly agreed, documented and subject to regular review.

5.4       Lending to Third Parties

The Council has the power to lend monies to third parties subject to a number of criteria. These are not treasury type investments rather they are policy investments. Any activity will only take place after relevant due diligence has been undertaken.

5.5       Updates to Accounting Requirements

§ IFRS9 – local authority override – English local authorities

The DLUHC enacted a statutory over-ride from 1 April 2018 for a five year period until 31 March 2023 following the introduction of IFRS 9 and the requirement for any capital gains or losses on marketable funds to be chargeable in year.  This has the effect of allowing any capital losses on funds to be held on the balance sheet until 31 March 2023, allowing councils to initiate an orderly withdrawal of funds if required.

§ IFRS 16 – Leasing

The CIPFA Code of Practice will incorporate the requirement to account for all leases onto the council’s balance sheet. There have been indications that the implementation date for this is going to be set back to 2022/23 due to pressures on staff from the COVID Pandemic.

Once implemented, this has the following impact to the Treasury Management Strategy:

· The MRP Policy sets out how MRP will be applied for leases bought onto the balance sheet;

· The Council’s Capital Financing Requirement authorised limit and operational boundary for 2022/23 onwards has been increased to reflect the estimated effect of this change. These limits can be amended during 2022/23 if required and bought to full Council to amend with the TMSS Mid Year report if the limits need to be increased following some more detailed work on the leases to be bought onto the balance sheet.

Counterparty List 2022/23                                                                                                                                                              ANNEX A

Bank with duration colour

Country

Fitch Ratings

Moody’s Ratings

S & P Ratings

CDS Price

ESCC Duration

Link Duration Limit

Money Limit

Specified Investments:

L Term

S Term

Viab.

Supp.

L Term

S Term

L Term

S Term

(Months)

(Months)

(£m)

Lloyds Banking Group:

Lloyds Bank

UK

A+

F1+

a

5

A1

P-1

A+

A-1

35.56

6

6

60

Bank of Scotland

UK

A+

F1

a

5

A1

P-1

A+

A-1

42.64

6

6

RBS/NatWest Group:

NatWest Bank

UK

A+

F1

a

5

A1

P-1

A

A-1

-

12

12

60

Royal Bank of Scotland

UK

A+

F1

a

5

A1

P-1

A

A-1

-

12

12

HSBC Bank

UK

AA-

F1+

a

1

A1

P-1

A+

A-1

39.03

12

12

60

Barclays Bank

UK

A+

F1

a

5

A1

P-1

A

A-1

53.97

6

6

60

Santander (UK)

UK

A+

F1

a

2

A1

P-1

A

A-1

-

6

6

60

Goldman Sachs IB

UK

A+

F1

-

1

A1

P-1

A+

A-1

65.21

6

6

60

Standard Chartered Bank

UK

A+

F1

a

5

A1

P-1

A

A-1

38.03

6

6

60

Nationwide Building Society

UK

A

F1

a

5

A1

P-1

A+

A-1

-

6

6

60

Handlesbanken

UK

AA

F1+

-

1

-

-

AA+

A-1+

-

12

12

60

Non UK Counterparties:

Australia & New Zealand Banking Group

Australia

A+

F1

a+

1

Aa3

P-1

AA-

A-1+

32.55

12

12

60

Commonwealth Bank of Australia

Australia

A+

F1

a+

1

Aa3

P-1

AA-

A-1+

32.65

12

12

60

National Australia Bank

Australia

A+

F1

a+

1

Aa3

P-1

AA-

A-1+

34.66

12

12

60

Westpac Banking Corp.

Australia

A+

F1

a+

1

Aa3

P-1

AA-

A-1+

35.62

12

12

60

Royal Bank of Canada

Canada

AA-

F1+

aa-

5

Aa2

P-1

AA-

A-1+

-

12

12

60

Toronto Dominion

Canada

AA-

F1+

aa-

5

Aa1

P-1

AA-

A-1+

-

12

12

60

National Bank of Canada

Canada

A+

F1

a+

5

Aa3

P-1

A

A-1

-

6

6

60

Dev.  Bank of Singapore

Singapore

AA-

F1+

aa-

1

Aa1

P-1

AA-

A-1+

-

12

12

60

Oversea Chinese Banking Corp

Singapore

AA-

F1+

aa-

1

Aa1

P-1

AA-

A-1+

-

12

12

60

United Overseas Bank

Singapore

AA-

F1+

aa-

1

Aa1

P-1

AA-

A-1+

-

12

12

60

Continued Counterparty list Bank with duration colour

Country

Fitch Ratings

Moody’s Ratings

S & P Ratings

CDS Price

ESCC Duration

Link Duration Limit

Money Limit

L Term

S Term

Viab.

Supp.

L Term

S Term

L Term

S Term

(Months)

(Months)

(£m)

Swedbank AB

Sweden

A+

F1+

a+

5

Aa3

P-1

A+

A-1

-

12

12

60

ABN AMRO Bank

Netherlands

A

F1

a

WD

A1

P-1

A

A-1

-

6

6

60

Rabobank

Netherlands

A+

F1

a+

WD

Aa2

P-1

A+

A-1

-

12

12

60

ING Bank NV

Netherlands

AA-

F1+

a+

WD

Aa3

P-1

A+

A-1

27.05

12

12

60

UBS

Switzerland

AA-

F1+

a+

5

Aa2

P-1

A+

A-1

40.06

12

12

60

Credit Suisse

Switzerland

A

F1

a-

5

A1

P-1

A+

A-1

61.45

6

6

60

DZ Bank

Germany

AA-

F1+

-

WD

Aa2

P-1

A+

A-1

-

12

12

60

Danske Bank

Denmark

A

F1

a

5

Aa2

P-1

A

A-1

33.66

6

6

60

Yellow	Purple	Blue	Orange	Red	Green	No Colour
Up to 5yrs	Up to 2yrs	Up to 1yr (semi nationalised UK banks)	Up to 1yr	Up to 6 months	Up to 100 days	Not to be used

Non-Specified Investments:
	Minimum credit Criteria	Maximum Investments	Period
UK Local Authorities	Government Backed	£60m	2 years
Corporate Bond Fund(s)	Investment Grade	£30m	2 – 5 years
Pooled Property Fund(s)	N/A	£30m	5+ years
Mixed Asset Fund(s)	N/A	£30m	2 - 5 years
Short Dated Bond Fund(s)	N/A	£30m	2 - 5 years

ANNEX B

ECONOMIC OVERVIEW

Provided by Link Asset Services December 2021

UK. The Monetary Policy Committee (MPC) voted 8-1 to raise Bank Rate by 0.15% from 0.10% to 0.25% and unanimously decided to make no changes to its programme of quantitative easing purchases due to finish in December 2021 at a total of £895bn.

The MPC disappointed financial markets by not raising Bank Rate at its November meeting. Until Omicron burst on the scene, most forecasters, therefore, viewed a Bank Rate increase as being near certain at this December meeting due to the way that inflationary pressures have been comprehensively building in both producer and consumer prices, and in wage rates. However, at the November meeting, the MPC decided it wanted to have assurance that the labour market would get over the end of the furlough scheme on 30th September without unemployment increasing sharply; their decision was, therefore, to wait until statistics were available to show how the economy had fared at this time.

On 10th December we learnt of the disappointing 0.1% m/m rise in GDP in October which suggested that economic growth had already slowed to a crawl even before the Omicron variant was discovered in late November. Early evidence suggests growth in November might have been marginally better. Nonetheless, at such low rates of growth, the government’s “Plan B” COVID-19 restrictions could cause the economy to contract in December.

On 14^th December, the labour market statistics for the three months to October and the single month of October were released.  The fallout after the furlough scheme was smaller and shorter than the Bank of England had feared. The single-month data were more informative and showed that LFS employment fell by 240,000, unemployment increased by 75,000 and the unemployment rate rose from 3.9% in September to 4.2%. However, the weekly data suggested this didn’t last long as unemployment was falling again by the end of October. What’s more, the 49,700 fall in the claimant count and the 257,000 rise in the PAYE measure of company payrolls suggests that the labour market strengthened again in November.  The other side of the coin was a further rise in the number of vacancies from 1.182m to a record 1.219m in the three months to November which suggests that the supply of labour is struggling to keep up with demand, although the single-month figure for November fell for the first time since February, from 1.307m to 1.227m.

These figures by themselves, would probably have been enough to give the MPC the assurance that it could press ahead to raise Bank Rate at this December meeting.  However, the advent of Omicron potentially threw a spanner into the works as it poses a major headwind to the economy which, of itself, will help to cool the economy.  The financial markets, therefore, swung round to expecting no change in Bank Rate.

On 15th December we had the CPI inflation figure for November which spiked up further from 4.2% to 5.1%, confirming again how inflationary pressures have been building sharply. However, Omicron also caused a sharp fall in world oil and other commodity prices; (gas and electricity inflation has generally accounted on average for about 60% of the increase in inflation in advanced western economies).

Other elements of inflation are also transitory e.g., prices of goods being forced up by supply shortages, and shortages of shipping containers due to ports being clogged have caused huge increases in shipping costs.  But these issues are likely to clear during 2022, and then prices will subside back to more normal levels.  Gas prices and electricity prices will also fall back once winter is passed and demand for these falls away.

Although it is possible that the Government could step in with some fiscal support for the economy, the huge cost of such support to date is likely to pose a barrier to incurring further major economy wide expenditure unless it is very limited and targeted on narrow sectors like hospitality, (as announced just before Christmas). The Government may well, therefore, effectively leave it to the MPC, and to monetary policy, to support economic growth – but at a time when the threat posed by rising inflation is near to peaking.

This is the adverse set of factors against which the MPC had to decide on Bank Rate. For the second month in a row, the MPC blind-sided financial markets, this time with a surprise increase in Bank Rate from 0.10% to 0.25%.  What’s more, the hawkish tone of comments indicated that the MPC is now concerned that inflationary pressures are indeed building and need concerted action by the MPC to counter. This indicates that there will be more increases to come with financial markets predicting 1% by the end of 2022. The 8-1 vote to raise the rate shows that there is firm agreement that inflation now poses a threat, especially after the CPI figure hit a 10-year high this week. The MPC commented that “there has been significant upside news” and that “there were some signs of greater persistence in domestic costs and price pressures”.

On the other hand, it did also comment that “the Omicron variant is likely to weigh on near-term activity”. But it stressed that at the November meeting it had said it would raise rates if the economy evolved as it expected and that now “these conditions had been met”.  It also appeared more worried about the possible boost to inflation form Omicron itself. It said that “the current position of the global and UK economies was materially different compared with prior to the onset of the pandemic, including elevated levels of consumer price inflation”. It also noted the possibility that renewed social distancing would boost demand for goods again, (as demand for services would fall), meaning “global price pressures might persist for longer”. (Recent news is that the largest port in the world in China has come down with an Omicron outbreak which is not only affecting the port but also factories in the region.)

On top of that, there were no references this month to inflation being expected to be below the 2% target in two years’ time, which at November’s meeting the MPC referenced to suggest the markets had gone too far in expecting interest rates to rise to over 1.00% by the end of the year. 

These comments indicate that there has been a material reappraisal by the MPC of the inflationary pressures since their last meeting and the Bank also increased its forecast for inflation to peak at 6% next April, rather than at 5% as of a month ago. However, as the Bank retained its guidance that only a “modest tightening” in policy will be required, it cannot be thinking that it will need to increase interest rates that much more. A typical policy tightening cycle has usually involved rates rising by 0.25% four times in a year. “Modest” seems slower than that. As such, the Bank could be thinking about raising interest rates two or three times next year to 0.75% or 1.00%.

In as much as a considerable part of the inflationary pressures at the current time are indeed transitory, and will naturally subside, and since economic growth is likely to be weak over the next few months, this would appear to indicate that this tightening cycle is likely to be comparatively short.

As for the timing of the next increase in Bank Rate, the MPC dropped the comment from November’s statement that Bank Rate would be raised “in the coming months”. That may imply another rise is unlikely at the next meeting in February and that May is more likely.  However, much could depend on how adversely, or not, the economy is affected by Omicron in the run up to the next meeting on 3rd February.  Once 0.50% is reached, the Bank would act to start shrinking its stock of QE, (gilts purchased by the Bank would not be replaced when they mature).

The MPC’s forward guidance on its intended monetary policy on raising Bank Rate versus selling (quantitative easing) holdings of bonds is as follows: -

· Raising Bank Rate as “the active instrument in most circumstances”.

· Raising Bank Rate to 0.50% before starting on reducing its holdings.

· Once Bank Rate is at 0.50% it would stop reinvesting maturing gilts.

· Once Bank Rate had risen to at least 1%, it would start selling its holdings.

Prospect for Interest Rates

The Council has appointed Link Group as its treasury advisor and part of their service is to assist the Council to formulate a view on interest rates. Link provided the following forecasts on 20th December 2021.  These are forecasts for certainty rates, gilt yields plus 80 bps.

Over the last two years, the coronavirus outbreak has done huge economic damage to the UK and to economies around the world. After the Bank of England took emergency action in March 2020 to cut Bank Rate to 0.10%, it left Bank Rate unchanged at its subsequent meetings until raising it to 0.25% at its meeting on 16th December 2021.

As shown in the forecast table above, the forecast for Bank Rate now includes five increases, one in December 2021 to 0.25%, then quarter 2 of 2022 to 0.50%, quarter 1 of 2023 to 0.75%, quarter 1 of 2024 to 1.00% and, finally, one in quarter 1 of 2025 to 1.25%.

Significant risks to the forecasts

· Mutations of coronavirus render current vaccines ineffective, and tweaked vaccines to combat these mutations are delayed, or cannot be administered fast enough to prevent further lockdowns.  25% of the population not being vaccinated is also a significant risk to the NHS being overwhelmed and lockdowns being the only remaining option.

• Labour and supply shortages prove more enduring and disruptive and depress economic activity The Monetary Policy Committee tightens monetary policy too late to ward off building inflationary pressures.

· The Monetary Policy Committee acts too quickly, or too far, over the next three years to raise Bank Rate and causes UK economic growth, and increases in inflation, to be weaker than we currently anticipate.

· The Monetary Policy Committee tightens monetary policy too late to ward off building inflationary pressures.

· The Government acts too quickly to cut expenditure to balance the national budget.

· UK / EU trade arrangements – if there was a major impact on trade flows and financial services due to complications or lack of co-operation in sorting out significant remaining issues.

· Longer term US treasury yields rise strongly and pull gilt yields up higher than forecast.

· Major stock markets e.g., in the US, become increasingly judged as being over-valued and susceptible to major price corrections. Central banks become increasingly exposed to the “moral hazard” risks of having to buy shares and corporate bonds to reduce the impact of major financial market selloffs on the general economy.

• Geopolitical risks, for example in Iran, North Korea, but also in Europe and Middle Eastern countries; on-going global power influence struggles between Russia/China/US. These could lead to increasing safe-haven flows.

The balance of risks to the UK economy: -

• The overall balance of risks to economic growth in the UK is now to the downside, including residual risks from Covid and its variants - both domestically and their potential effects worldwide.

Forecasts for Bank Rate

It is not expected that Bank Rate will go up fast after the initial rate rise as the supply potential of the economy is not likely to have taken a major hit during the pandemic: it should, therefore, be able to cope well with meeting demand after supply shortages subside over the next year, without causing inflation to remain elevated in the medium-term, or to inhibit inflation from falling back towards the MPC’s 2% target after the spike up to around 5%. The forecast includes four increases in Bank Rate over the three-year forecast period to March 2025, ending at 1.25%. However, it is likely that these forecasts will need changing within a relatively short timeframe for the following reasons: -

• We do not know how severe an impact Omicron could have on the economy and whether there will be another lockdown or similar and, if there is, whether there would be significant fiscal support from the Government for businesses and jobs.
• There were already increasing grounds for viewing the economic recovery as running out of steam during the autumn and now into the winter. And then along came Omicron to pose a significant downside threat to economic activity.  This could lead into stagflation, or even into recession, which would then pose a dilemma for the MPC as to whether to focus on combating inflation or supporting economic growth through keeping interest rates low.
• Will some current key supply shortages spill over into causing economic activity in some sectors to take a significant hit.
• Rising gas and electricity prices in October and next April and increases in other prices caused by supply shortages and increases in taxation next April, are already going to deflate consumer spending power without the MPC having to take any action on Bank Rate to cool inflation.
• On the other hand, consumers are sitting on over £160bn of excess savings left over from the pandemic so when will they spend this sum, in part or in total.
• It looks as if the economy coped well with the end of furlough on 30th September. It is estimated that there were around 1 million people who came off furlough then and there was not a huge spike up in unemployment. The other side of the coin is that vacancies have been hitting record levels so there is a continuing acute shortage of workers. This is a potential danger area if this shortage drives up wages which then feed through into producer prices and the prices of services i.e., a second-round effect that the MPC would have to act against if it looked like gaining significant momentum.
• We also recognise there could be further nasty surprises on the Covid front beyond the Omicron mutation.
• If the UK invokes article 16 of the Brexit deal over the dislocation in trading arrangements with Northern Ireland, this has the potential to end up in a no-deal Brexit.

In summary, with the high level of uncertainty prevailing on several different fronts, we expect to have to revise our forecasts again - in line with whatever the new news is.

It should also be borne in mind that Bank Rate being cut to 0.25% and then to 0.10%, were emergency measures to deal with the Covid crisis hitting the UK in March 2020. At any time, the MPC could decide to simply take away such emergency cuts on no other grounds than they are no longer warranted, and as a step forward in the return to normalisation. In addition, any Bank Rate under 1% is both highly unusual and highly supportive of economic growth.

Forecasts for PWLB rates and gilt and treasury yields

Since the start of 2021, we have seen a lot of volatility in gilt yields, and hence PWLB rates. As the interest forecast table for PWLB certainty rates above shows, there is forecast to be a steady, but slow, rise in both Bank Rate and gilt yields during the forecast period to March 2025, though there will doubtless be a lot of unpredictable volatility during this forecast period.

While monetary policy in the UK will have a major impact on gilt yields, there is also a need to consider the potential impact that rising treasury yields in America could have on our gilt yields.  As an average since 2011, there has been a 75% correlation between movements in US 10-year treasury yields and UK 10-year gilt yields. This is a significant UPWARD RISK exposure to our forecasts for longer term PWLB rates. However, gilt yields and treasury yields do not always move in unison.

There are also possible downside risks from the huge sums of cash that the UK populace have saved during the pandemic; when savings accounts earn little interest, it is likely that some of this cash mountain could end up being invested in bonds and so push up demand for bonds and support their prices i.e., this would help to keep their yields down. How this will interplay with the Bank of England eventually getting round to not reinvesting maturing gilts and then later selling gilts, will be interesting to monitor.

There is likely to be exceptional volatility and unpredictability in respect of gilt yields and PWLB rates due to the following factors: -

• How strongly will changes in gilt yields be correlated to changes in US treasury yields (see below). Over 10 years since 2011 there has been an average 75% correlation between movements in US treasury yields and gilt yields.  However, from time to time these two yields can diverge. Lack of spare economic capacity and rising inflationary pressures are viewed as being much greater dangers in the US than in the UK. This could mean that central bank rates will end up rising earlier and higher in the US than in the UK if inflationary pressures were to escalate; the consequent increases in treasury yields could well spill over to cause (lesser) increases in gilt yields. There is, therefore, an upside risk to forecasts for gilt yields due to this correlation. The Link Group forecasts have included a risk of a 75% correlation between the two yields.
• Will the Fed take action to counter increasing treasury yields if they rise beyond a yet unspecified level.
• Would the MPC act to counter increasing gilt yields if they rise beyond a yet unspecified level.
• How strong will inflationary pressures actually turn out to be in both the US and the UK and so put upward pressure on treasury and gilt yields.
• How will central banks implement their new average or sustainable level inflation monetary policies.
• How well will central banks manage the withdrawal of QE purchases of their national bonds i.e., without causing a panic reaction in financial markets as happened in the “taper tantrums” in the US in 2013
• Will exceptional volatility be focused on the short or long-end of the yield curve, or both.

The forecasts are also predicated on an assumption that there is no break-up of the Eurozone or EU within the forecasting period, despite the major challenges that are looming up, and that there are no major ructions in international relations, especially between the US and China / North Korea and Iran, which have a major impact on international trade and world GDP growth.

The balance of risks to medium to long term PWLB rates: -

There is a balance of upside risks to forecasts for medium to long term PWLB rates.

A new era – a fundamental shift in central bank monetary policy

• One of the key results of the pandemic has been a fundamental rethinking and shift in monetary policy by major central banks like the Fed, the Bank of England and the ECB, to tolerate a higher level of inflation than in the previous two decades when inflation was the prime target to bear down on so as to stop it going above a target rate. There is now also a greater emphasis on other targets for monetary policy than just inflation, especially on ‘achieving broad and inclusive “maximum” employment in its entirety’ in the US, before consideration would be given to increasing rates.
• The Fed in America has gone furthest in adopting a monetary policy based on a clear goal of allowing the inflation target to be symmetrical, (rather than a ceiling to keep under), so that inflation averages out the dips down and surges above the target rate, over an unspecified period.

• The Bank of England has also amended its target for monetary policy so that inflation should be ‘sustainably over 2%’ before starting on raising Bank Rate and the ECB now has a similar policy.
• For local authorities, this means that investment interest rates and very short term PWLB rates will not be rising as quickly or as high as in previous decades when the economy recovers from a downturn and the recovery eventually runs out of spare capacity to fuel continuing expansion. 

• Labour market liberalisation since the 1970s has helped to break the wage-price spirals that fuelled high levels of inflation and has now set inflation on a lower path which makes this shift in monetary policy practicable. In addition, recent changes in flexible employment practices, the rise of the gig economy and technological changes, will all help to lower inflationary pressures. 
• Governments will also be concerned to see interest rates stay lower as every rise in central rates will add to the cost of vastly expanded levels of national debt; (in the UK this is £21bn for each 1% rise in rates). On the other hand, higher levels of inflation will help to erode the real value of total public debt

Investment and borrowing rates

· Investment returns are expected to improve in 2022/23. However, while markets are pricing in a series of Bank Rate hikes, actual economic circumstances may see the MPC fall short of these elevated expectations.

· Borrowing interest ratesfell to historically very low rates as a result of the COVID crisis and the quantitative easing operations of the Bank of England and still remain at historically low levels. The policy of avoiding new borrowing by running down spare cash balances has served local authorities well over the last few years. 

· On 25.11.20, the Chancellor announced the conclusion to the review of margins over gilt yields for PWLB rates which had been increased by 100 bps in October 2019.  The standard and certainty margins were reduced by 100 bps but a prohibition was introduced to deny access to borrowing from the PWLB for any local authority which had purchase of assets for yield in its three-year capital programme. The current margins over gilt yields are as follows: -.

· PWLB Standard Rate is gilt plus 100 basis points (G+100bps)

· PWLB Certainty Rate is gilt plus 80 basis points (G+80bps)

· PWLB HRA Standard Rate is gilt plus 100 basis points (G+100bps)

· PWLB HRA Certainty Rate is gilt plus 80bps (G+80bps)

· Local Infrastructure Rate is gilt plus 60bps (G+60bps)

ANNEX C

PRUDENTIAL AND TREASURY INDICATORS 2022/23 to 2024/25

The Council’s capital expenditure plans are a key driver of treasury management activities. The output of the capital expenditure plans is reflected in prudential indicators. Local Authorities are required to ‘have regard to’ the Prudential Code and to set Prudential Indicators for the next three years to ensure that the Council’s capital investment plans are affordable, prudent and sustainable. The Code sets out the indicators that must be used but does not suggest limits or ratios as these are for the authority to set itself.

The Prudential Indicators for 2022/23 to 2024/25 are set out in Table A below:

Table A	2022/23 Estimate	2023/24 Estimate	2024/25 Estimate
Capital Expenditure £m (gross) Council’s capital expenditure plans	£102m	£77m	£79m
Capital Financing Requirement £m* Measures the underlying need to borrow for capital purposes (including PFI & Leases)	£403m	£427m	£458m
Ratio of financing costs to net revenue stream** Identifies the trend in the cost of capital (borrowing and other long term obligation costs net of investment income) against net revenue stream	4.43%	4.67%	4.52%

* From 2022/23, the CFR includes an estimate for leases that will be bought onto the balance sheet under a change in leasing accounting regulations.

** the ratio of financing costs to net revenue stream illustrates the percentage of the Council’s net revenue budget being used to finance the council’s borrowing. This includes interest costs relating to the council’s borrowing portfolio and MRP, net of the investment income from the council’s investment portfolio.

The Treasury Management Code requires that Local Authorities set a number of indicators for treasury performance in addition to the Prudential Indicators which fall under the Prudential Code.  The Treasury Indicators for 2022/23 to 2024/25 are set out in Tables B & C below. These have been calculated and determined by Officers in compliance with the Treasury Management Code of Practice.:

Table B	2022/23 Estimate	2023/24 Estimate	2024/25 Estimate
Authorised Limit for External Debt £m* The Council is expected to set a maximum authorised limit for external debt. This represents a limit beyond which external debt is prohibited, and this limit needs to be set or revised by Full Council.	£433m	£457m	£488m
Operational boundary for external debt £m* The Council is required to set an operational boundary for external debt. This is the limit which external debt is not normally expected to exceed. This indicator may be breached temporarily for operational reasons.	£413m	£437m	£468m
Principal Sums invested for longer than 365 days	£60m	£60m	£60m
Control on interest rate exposure: Upper limit for fixed interest rate exposure Identifies a maximum limit for fixed interest rates for borrowing and investments.	100%	100%	100%
Control on interest rate exposure: Upper limit for variable interest rate exposure Identifies a maximum limit for variable interest rates for borrowing and investments.	15%	15%	15%

*From 2021/22 The Authorised Limit and Operational Boundary includes an estimate for leases that will be bought onto the balance sheet under a change in leasing accounting regulations.

Table C
Maturity Structure of fixed interest rate borrowing The Council needs to set upper and lower limits with respect to the maturity structure of its borrowing.
	Lower	Upper
Under 12 months	0%	25%
12 months to 2 years	0%	40%
2 years to 5 years	0%	60%
5 years to 10 years	0%	70%
Over 10 years	0%	90%

ANNEX D

SCHEME OF DELEGATION

1.         Full Council

In line with best practice, Full Council is required to receive and approve, as a minimum, three main reports each year, which incorporate a variety of polices, estimates and actuals. These reports are:

i. Treasury Management Policy and Strategy Report

The report covers:

§ the capital plans (including prudential indicators);

§ the Capital Strategy;

§ a Minimum Revenue Provision Policy (how residual capital expenditure is charged to revenue over time);

§ the Treasury Management Strategy (how the investments and borrowings are to be organised) including treasury indicators; and

§ an investment strategy (the parameters on how investments are to be managed).

ii. A Mid-Year Review Report and a Year End Stewardship Report

These will update members with the progress of the capital position, amending prudential indicators as necessary, and indicating whether the treasury strategy is meeting the strategy or whether any policies require revision. The report also provides details of a selection of actual prudential and treasury indicators and actual treasury operations compared to the estimates within the strategy.

2.         Cabinet

§ Approval of the Treasury Management quarterly update reports;

§ Approval of the Treasury Management outturn report. 

3.         Audit Committee

§ Scrutiny of performance against the strategy.

4.         Role of the Section 151 Officer

The Section 151 (responsible) Officer:

§ recommending clauses, treasury management policy/practices for approval, reviewing the same regularly, and monitoring compliance;

§ submitting regular treasury management policy reports;

§ submitting budgets and budget variations;

§ receiving and reviewing management information reports;

§ reviewing the performance of the treasury management function;

§ ensuring the adequacy of treasury management resources and skills, and the effective division of responsibilities within the treasury management function;

§ ensuring the adequacy of internal audit, and liaising with external audit;

§ recommending the appointment of external service providers.

There are further responsibilities for the S151 Officer identified within the 2017 Code in respect of non-financial investments. They are identified and listed in the Capital Strategy where relevant.

ANNEX E

INVESTMENT PRODUCT GLOSSARY

Bank / Building Society: Accounts, deposits, certificates of deposit and senior unsecured bonds with banks and building societies, other than multilateral development banks. These investments are subject to the risk of credit loss via a bail-in should the regulator determine that the bank is failing or likely to fail.

Bank / Building Society Secured (Covered Bonds): These investments are secured on the bank’s assets, which limit the potential losses in the unlikely event of insolvency, and means that they are exempt from bail-in.

Corporate Bonds: Bonds issued by companies other than banks and registered providers. These investments are not subject to bail-in but are exposed to the risk of the company going insolvent.

Enhanced Cash / Ultra Short Dated Bond Funds: Funds designed to produce an enhanced return over and above a Money Market Fund. The manager may use a wider range of alternative options to try and generate excess performance. These could include different counterparties, instruments as well as longer dated investments.

Equity Fund:Equity funds are pooled investment vehicles that will focus investments primarily in UK equities.

Government: Loans, bonds and bills issued or guaranteed by UK government, local authorities and supranational banks. These investments are not subject to bail-in, and there is a minimal risk of insolvency.

Money Market Funds: An open ended fund that invests in short term debt securities, offers same-day liquidity and very low volatility.

Mixed Asset Funds: Rather than focus on a particular asset class, these funds will look to invest across a broader range of classes in an effort to provide investors with a smoother performance on a year-to-year basis. Primarily, the asset classes will be equities and fixed income, but the latter will include both corporate and government-level investments.

Pooled Property Funds: Shares in diversified property investment vehicles. Property funds offer enhanced returns over the longer term but are more volatile in the short term. The funds have no defined maturity date, but are available for withdrawal after a notice period

Short Dated Bond Funds: Funds designed to produce an enhanced return over and above an Ultra Short Dated Fund. The manager may use a wider range of alternative options to try and generate excess performance. These could include different counterparties, instruments as well as longer dated and a proportion of lower rated investments. The return on the funds are typically much higher but can be more volatile than Ultra-Short Dated bond funds, so a longer investment time horizon is recommended.