Treasury Management - 4th quarter 2008-09 update

Report: 5
Date: 30 April 2009
By: the Treasurer

Summary

This report invites members to review Treasury Management activity for the period 1 January 2009 to 31 March 2009.

A. Recommendations

That Members consider and note this report

B. Supporting information

1. In line with CIPFA guidelines for the monitoring of treasury management operations this quarterly report reviews treasury management and performance for the 4th quarter 2008-09.

2. At the meeting of 16th March 2009 this Resources Sub-Committee, in reviewing the 3rd quarter 2008-09 report, members felt that there was scope for a rationalisation of the information provided across each of the three months. The format of this report is significantly changed, principally by amalgamating the monthly data and highlighting key areas of treasury management.

3. Members also felt that in order to be able to effectively consider and scrutinise the detailed monitoring reports they would need to receive training in treasury management. A training session has been scheduled for this meeting.

Average Balances

4. Cash balances steadily reduced during the quarter with an average investment balance of £125 million. This includes the £10 million deposit with Landsbanki Islands due for repayment in July 2009 but currently frozen by the Icelandic government. Included in cash balances is £10 million of new borrowing undertaken in February 2009 from the PWLB.

5. Appendix 1 provides a breakdown of average balances by market sector. The largest percentage (34%) is call money held with RBS and provides instant access to meet short term commitments. The balance with the DMO is an average of 20%. The balances with the foreign bank and building society sectors reflect longer term deals outstanding. These balances will become zero as existing deposits mature and no new funds placed in these sectors.

6. During the quarter 78 deposits were placed. These are listed in exempt Appendix 2. Members should note that certain institutions were removed from the MPA lending list during the period and the frequency with which deposits are placed with the DMO.

Income on Investments

7. Income on investments for the period is £0.641 million at a return of 2.08%. The average rate of return has declined by 2.2% from the previous quarter and the Bank of England reduced Base Rate by a further 1.5% to 0.5%. The average length of investments is at 6 days reflecting the need to cover short-term cash flow commitments.

8. Appendix 1 also shows the % return and income by sector. As mentioned at paragraph 5 above this includes longer term fixed rate deposits with foreign banks and building societies that were placed when prevailing interest rates were more favourable.

9. The interest on investments budget for 2008-09 was £11.83 million. The final outturn was £12.17 million of which £0.641 million (about 5%) was earned in the final quarter. This illustrates the impact of lower interest rates and lower cash balances following the purchase of New Scotland Yard. A summary of investment income against budget is set out at Appendix 3.

Borrowing

10. As mentioned in paragraph 4 cash balances have steadily reduced during the period and in February 2009 the MPA secured borrowing of £10 million from the PWLB. Repayments are equal instalments over the 20 year term of the loan. Total MPA borrowing is now £47.34 million. The MPA Treasurer and officers of the MPS finance team meet monthly to assess future borrowing requirements.

Economic background

11. The Bank of England cut Base Rate by 50 basis points in each of the months during the quarter (from 2% to 0.5%). This action by the authorities was priced into the sterling money markets and short-term rates generally followed Base Rate lower. However with Base Rate now at 0.5% there would appear to be very limited scope for reducing rates further. In March 2009 the Bank of England introduced a new initiative to stimulate the economy in the form of an Asset Purchase Programme or “Quantative Easing” as it is widely known. The Bank of England announced a £75 billion asset purchase programme to be conducted until the end of June 2009, with up to £150 billion being allocated for use by HM Treasury.

12. Economic data for the period remained depressed and it was confirmed that this is the biggest slide in the UK economy since the depression of the 1930’s. Unemployment increased again to around two million and this is expected to increase. The motor industry was the latest sector to seek Government assistance, although this was thought to be a short-term measure to the industries financial problems. The housing market also reported further falls. The Retail Price Index (RPI) fell to 0% in February. RPI includes mortgage payments, which have dropped considerably as interest rates have fallen. However the Consumer Price Index (CPI), which excludes mortgage payments has risen by 3.2% in the year to February. The rise in CPI illustrates rising costs in many products, with food being one of the major components. This will be a further concern for the Bank of England, as they would not welcome more inflationary pressures from the extra money raised by Quantitive Easing.

Abbreviations

DMO - Debt Management Office

PWLB - Public Works Loans Board

C. Race and equality impact

Consideration is given to the requirements of the Race Relations (Amendment) Act through the MPA/MPS Environmental Strategy and the developing Ethical Investment Policy whereby best practice standards are promoted.

D. Financial implications

Final outturn for 2008/09 was £12.17 million

E. Background papers

• Resources Sub Committee 16 March 2009  Report 6

F. Contact details

Report author: Paul Daly, Director of Exchequer Services, MPS

For more information contact:

MPA general: 020 7202 0202
Media enquiries: 020 7202 0217/18

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