Download 52111imp - Aberdeenshire Council

Meeting Title:
Policy & Resources
Committee
Meeting Date:
26/02/2004
Meeting Time:
10:15:00
Arrangements:
Committee Room No. 5,
Woodhill House,
Aberdeen
Agenda Item Number:
5
Agenda Item Title:
Treasury Management
Strategy Statement
2004/2005
Item Description:
Report by Director of
Finance
Planning App Ref No(s):
Agenda Item Import:
REPORT TO POLICY & RESOURCES COMMITTEE – 26 FEBRUARY 2004
TREASURY MANAGEMENT STRATEGY STATEMENT 2004/05
1.
Reason for Report
1.1
This report seeks agreement to the proposed Treasury Management Strategy Statement for 2004/05.
2.
Treasury Strategy Statement
2.1
This Treasury Management Strategy details the expected activities of the Treasury function in the forthcoming financial year (2004/05).
Its production and submission to the Policy and Resources Committee is a requirement of the Chartered Institute of Public Finance and Accountancy
(CIPFA) Code of Practice for Treasury Management in the Public Services. The suggested strategy for 2004/05 in respect of the following aspects of
the treasury management function is based upon officers’ views on interest rates, supplemented with leading market forecasts provided by the
Council’s treasury advisers. The strategy covers:
·
prospects for interest rates;
·
treasury limits for 2004/05;
·
the borrowings strategy;
·
the temporary investments strategy;
·
debt rescheduling;
·
the balanced budget requirement on the Council.
Prospects for Interest Rates
2.2
Inflation is expected to remain slightly below the Monetary Policy Committee’s (MPC) target range for several months. However, the
MPC has recently taken the view that the recovery in the world economy has become more broadly based than previously. This, combined with
concerns over house price inflation and the growth of consumer credit, has recently prompted the MPC to raise the base rate to 4%. Market
expectations are for base rate to continue to increase in 2004. The consensus view suggests that base rate will be in the range 4.25% - 4.5% by the
end of 2004/05.
Treasury Limits For 2004/05
2.3
It is recommended good practice for the Council to set certain treasury operational limits as part of this policy in order to help to reduce
risk. The majority of borrowing is in the form of fixed rate loans as this leads to greater stability in overall borrowing costs. Some exposure to
variable rate loans may be beneficial in a period of projected falling interest rates. Exposure to longer term variable rate loans and temporary loans
together with long term borrowing maturing in the forthcoming financial year will not exceed 30% of total borrowing.
Borrowings Strategy
2.4
Based upon the prospects for interest rates outlined above, there are a number of strategy options available. The anticipation is that
short-term rates will continue to be cheaper than long fixed rate borrowing for most of 2004/05. Short term rates are expected to be relatively
stable at or near current levels. Long term rates are likely to edge up if the base rate increases or there is a strong market expectation of an
increase. These expectations provide a variety of options:·
That short term rates will be good value compared to long term rates, and are expected to be relatively stable for a reasonable period, so
that best value will be found by borrowing short term at variable rates, or for short fixed periods, in order to minimise borrowing costs in the short
term.
·
That the risks intrinsic in the shorter term variable rates are such, when compared to borrowing relatively low long term funding, which
may be achievable early in 2004/05, that the Council will maintain a stable, longer term portfolio by drawing longer term fixed rate funding at a
marginally higher rate.
Against this background caution will be adopted with the 2004/05 treasury operations. The Director of Finance will monitor the interest rate market
and adopt a pragmatic approach to any changing circumstances. Actual borrowing decisions will, of course, depend upon market conditions at the
time.
Temporary Investments Strategy
2.5
Aberdeenshire Council maintains only temporary, short term investments and investments will accordingly be made with reference to
cash flow requirements.
Lending of temporary surplus funds will only be to third parties eligible to borrow those funds in accordance with the Council’s Investment Policy.
Debt Rescheduling
2.6
Debt rescheduling is an accepted tool of effective treasury management. It involves a constant monitoring of the Council’s loan debt in
order that existing debt at high rates of interest may be replaced with debt at lower rates of interest, thus generating savings for the Council. Debt
rescheduling does depend on prevailing rates of interest and will only be undertaken, in conjunction with the Council’s advisers, when it is in the
Council’s interest to do so. The rescheduling of debt is Council policy as part of the treasury management function delegated to the Director of
Finance.
Balanced Budget Requirement on the Council
2.7
Aberdeenshire Council is prevented by statute from borrowing to finance revenue expenditure. All borrowing undertaken by
Aberdeenshire Council will be for the purpose of financing capital expenditure or short term cash flow requirements only.
3.
Recommendations
3.1
That the Council approves the Treasury Management Strategy as set out at paragraphs 2.1 to 2.7.
Charles Armstrong
Director of Finance
Report prepared by Ewan Black
10 February 2004
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