"SUBJECT Treasury Management and Annual Investment Strategy 200607"
AGENDA ITEM NO. SOUTH HOLLAND DISTRICT COUNCIL REPORT TO: CABINET 21st FEBRUARY 2006 BY: HEAD OF FINANCE SUBJECT: Treasury Management and Annual Investment Strategy 2006/07 PURPOSE: To Adopt a Strategy for 2006/07 “It is considered that this report will result in the Cabinet submitting recommendations to full Council rather than making an executive decision. This is because the action(s) proposed require amendment(s) to the approved policy framework or budget. Only the full Council can make amendments to the policy framework or budget, and the proposed action(s) therefore cannot be undertaken without full Council approval. In view of this call-in procedure will NOT apply.” 1.0 INTRODUCTION 1.1 The Local Government Act 2003 requires the Council to “have regard to” the Prudential Code and to set Prudential Indicators for the next 3 years and to ensure that the Council’s capital investment plans are affordable, prudent and sustainable. 1.2 The Act therefore requires the Council to set out its treasury strategy for borrowing and to prepare an Annual Investment Strategy; this sets out the Council’s policies for managing its investments and for giving priority to the security and liquidity of those investments. 1.3 The Prudential Indicators, Treasury Management Strategy and Annual Investment Strategy have been combined into one document the “Treasury Management and Annual Investment Strategy”; this has been prepared in the corporate format and is attached at Appendix A. 1.4 The Council adopted the CIPFA Code of Practice on Treasury Management on the 14th May 2003. 2.0 PRUDENTIAL INDICATORS In setting the Prudential Indicators consideration must be given to: Affordability, e.g. implications for council tax and rent levels Prudence and sustainability e.g. implications for external borrowing Value for money e.g. options appraisal Stewardship of assets e.g. asset management planning Service objectives e.g. strategic planning for the authority Practicality e.g. achievability of the forward plan A fundamental aspect of the prudential system is the integration of capital, revenue and treasury management decisions at a local level. 3.0 ALTERNATIVE OPTIONS There are no alternative options presented. 1 of 20 4.0 REASON FOR RECOMMENDATION To comply with the legislative requirements under the Local Government Act 2003 5.0 RECOMMENDATION 5.1 It is recommended to Council that: The Treasury Management and Annual Investment Strategy as attached are submitted for approval. Background Papers:- (a) Sector Briefings Local Government (Access to Information) Act 1985 Please contact Elizabeth Jones, the Head of Finance, if you want more information about this report or the background papers. You can contact her: by post at the Council Offices, Priory Road, Spalding, Lincolnshire, PE11 2XE by phone on 01775 761161 by email at firstname.lastname@example.org File Ref: Appendices: Appendix A: Treasury Management and Annual Investment Strategy 2 of 20 APPENDIX A STRATEGY TITLE Treasury Management and Annual Investment Strategy 2006/07 REVISION DATE To apply from 1st April 2006 REPLACES POLICY Treasury Management and Annual Investment Strategy 2005/06 POLICY NUMBER 0053 POLICY AIM The Local Government Act 2003 requires the Council 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 programme is affordable, prudent and sustainable. The Act therefore requires the Council to set out its treasury strategy for borrowing and to prepare an Annual Investment Strategy; this sets out the Council’s policies for managing its investments and for giving priority to the security and liquidity of those investments. EXECUTIVE SUMMARY The strategy for 2006/07 is based upon the Authority’s view on interest rates, supplemented with leading market forecasts provided by the Council’s treasury advisor Sector Treasury Services Ltd. The strategy covers: Treasury limits Prudential Indicators for 2006/07 to 2008/09 Prospects for interest rates The borrowing requirement The investment strategy The current treasury position Any extraordinary treasury issues The strategy sets the ground rules to ensure the effective management of cash flows, borrowings and investments of the authority’s own funds; and ensuring the effective management of associated risks; and the pursuit of optimum performance or return consistent with those risks. It also ensures that the authority maintains a prudential financial framework and keeps its commitments in balance with available resources. Monitoring income and expenditure levels to ensure that this balance is maintained and taking corrective action taken when necessary. Through the Treasury Management Practices the authority puts in place effective internal financial controls covering codified guidance, budgetary systems, supervision, management review and 3 of 20 monitoring, physical safeguards, segregation of duties, accounting procedures, information systems, risk assessments, authorisation and approval processes. POLICY STATEMENT This policy has been developed to reflect the requirements of the Local Government Act 2003 and in accordance with the Council’s approved Treasury policy. The Council defines the policies and objectives of its treasury management activities as follows: - 1. This organisation defines its treasury management activities as: “The management of the authority’s 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”. 2. This organisation 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 organisation. 3. This organisation 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 best value in treasury management, and to employing suitable performance measurement techniques, within the context of effective risk management.” 1.0 TREASURY LIMITS FOR 2006/07 TO 2008/09 It is a statutory duty under Section 3 of the Local Government Act 2003 and supporting regulations, for the Council to determine and keep under review how much it can afford to borrow. The amount so determined is termed the “Affordable Borrowing Limit” within the Act and is the equivalent of the ‘Authorised limit’ as set out below. The Council must have regard to the Prudential Code when setting the Affordable Borrowing Limit, which essentially requires it to ensure that total capital investment remains within sustainable limits and, in particular, that the impact upon its future council tax and council rent levels is ‘acceptable’. Whilst termed an “Affordable Borrowing Limit”, the capital programme to be considered for inclusion incorporate financing by both external borrowing and other forms of liability, such as credit arrangements. The affordable borrowing limit is to be set, on a rolling basis, for the forthcoming financial year and two successive financial years. 4 of 20 2.0 PRUDENTIAL INDICATORS FOR 2006/07 – 2008/09 Prudential Indicators are used to provide performance measurement in managing and controlling the impact of capital investment decisions. They must be set by each local authority for the forthcoming year and the following 2 financial years. There are 5 key Prudential Indicator headings as set out below. They are, however, interrelated and should not be looked at in isolation. 2004/05 2005/06 2006/07 2007/08 2008/09 1. AFFORDABILITY actual probable estimate estimate estimate outturn £’000 £’000 £’000 £’000 £’000 1a. Net Financing Costs Non – HRA -613 -859 -575 -569 -571 HRA 2,044 2,035 2,168 2,207 2,386 Total Financing Costs 1,431 1,176 1,593 1,638 1,815 1b. Ratio of financing costs to net revenue stream % % % % % Non – HRA -5.9 -7.8 -4.8 -4.6 -4.4 HRA 19.7 19.0 19.8 18.8 19.3 1c. Estimates of the incremental £3.34 £3.43 £2.08 £0.75 £0.72 impact of capital investment decisions on the Council Tax 1d. Estimates of the incremental £0.90 £1.18 £1.67 £1.43 £1.30 impact of capital investment decisions on Housing Rents These indicators compare the cost of all the authority’s external borrowing with its overall revenue expenditure. They also identify the increase in Council Tax that will result from any additional borrowing. Note:1b – The non-HRA ratio of financing costs to net revenue stream is negative due to the high level of investment income and the authority having no requirement to borrow up to 2008/09. This measure is designed to ensure that medium term borrowing is only used for capital purposes. 2004/05 2005/06 2006/07 2007/08 2008/09 2. PRUDENCE actual probable estimate Estimate estimate outturn £'000 £'000 £'000 £'000 £'000 2a. Net borrowing (negative figure -12,931 -18,400 -9,200 -8,100 -7,300 represents investments) 2b. Capital financing requirement 1,692 2,178 2,658 3,172 3,701 5 of 20 Where net external borrowing exceeds the capital financing requirement, this would imply that net external borrowing is funding the day to day operational cost of the authority. Note: 2a/2b The figures for 2006/07 show that investments are estimated at £9,200k which is in excess of the capital financing requirement, but investments are diminishing over the 3 year forecast to £7,300k. 2004/05 2005/06 2006/07 2007/08 2008/09 3. CAPITAL EXPENDITURE actual probable estimate estimate estimate outturn £'000 £'000 £'000 £'000 £'000 3a. Capital Expenditure Non – HRA 1,284 3,459 2,850 620 608 HRA 2,956 5,727 3,824 3,704 3,359 TOTAL 4,240 9,186 6,674 4,324 3,967 3b. Capital Financing Requirement Non - HRA 2,087 2,053 2,025 1,992 1,961 HRA -395 125 633 1,180 1,740 TOTAL 1,692 2,178 2,658 3,172 3,701 The capital financing requirement is calculated from the council’s balance sheet and the Prudential Code specifies which items should be included and excluded. The capital financing requirement will include the cumulative effect of capital payments and commitments in previous years and the following and subsequent financial years. This reflects the council’s underlying need to use external borrowing. 2004/05 2005/06 2006/07 2007/08 2008/09 4. EXTERNAL DEBT actual probable estimate estimate estimate outturn £'000 £'000 £'000 £'000 £'000 4a. Authorised limit for external debt - Borrowing 3,000 3,500 3,500 3,500 3,500 other long term liabilities - (deferred credit re 45 37 25 19 14 council house mortgages) TOTAL 3,045 3,537 3,525 3,519 3,514 4b. Operational boundary for external debt - borrowing 1,692 2,178 2,658 3,172 3,701 other long term liabilities – (deferred credit re 45 37 25 19 14 council house mortgages) TOTAL 1,737 2,215 2,683 3,191 3,715 Actual external debt 45 37 25 19 14 6 of 20 These indicators set out the limits for external borrowing. The authorised limit reflects a level of borrowing which, while not desired, could be afforded but may not be sustainable. It is set at this level to cover potential short term debit positions in the unlikely event of an investment not being returned on the maturity date or date requested for no notice funds. The operational limit acts as a warning indicator. There may be occasional (but not sustained) breaches of the operational boundary due to cash-flow variations. Sustained breaches would give an indication that the authority may be in danger of stepping beyond the prudential boundaries it has set itself. This is reflected by current capital and revenue estimates. 2004/05 2005/06 2006/07 2007/08 2008/09 5. TREASURY MANAGEMENT actual probable estimate estimate estimate outturn % % £’000 £’000 £’000 5a. Adoption of the CIPFA Code for yes yes yes yes Yes Treasury Management 5b. Upper limit for fixed interest 20% 20% 3,701 3,701 3,701 rate exposure Upper limit for variable rate 100% 100% 925 925 925 exposure 5c. Upper and lower limits for the N/a N/a N/a N/a N/a maturity structure of borrowing 5d. Prudential limit for total 20% 20% 50% 50% 50% principal sums invested for longer than 364 days The adoption of the CIPFA Code is important and provides for prudential financial management of the council. The purpose of these indicators is to ensure that a balanced portfolio of debt and investment is provided, to limit exposure to risk associated with changes in interest rates and to ensure there is a balance between long and short term cashflow requirements. Note: 5b. An investment placed for less than 365 days is classed as variable rate exposure, over one year is classed as fixed rate exposure. 5c. This would be reviewed if borrowing was undertaken. 7 of 20 3.0 CURRENT TREASURY POSITION £’000s Fixed Rate Borrowing 0 Variable Rate Borrowing 0 Other Long Term Liabilities 37 Total Debt 37 Investments 18,400 4.65% average rate S106 Investments 1,092 Total Investments 19,492 Anticipated position at 31st March 2006 4.0 PROSPECTS FOR INTEREST RATES The Council has appointed Sector Treasury Services as treasury adviser to the Council and part of their service is to assist the Council to formulate a view on interest rates. Appendix A draws together a number of current City forecasts for short term or variable (the base rate or repo rate) and longer fixed interest rates. The following table gives the Sector central view. Sector View: Interest rate forecast – 18.10.05 Q/E4 Q/E1 Q/E2 Q/E3 Q/E4 Q/E1 Q/E2 Q/E3 Q/E4 2005 2006 2006 2006 2006 2007 2007 2007 2007 Base 4.50% 4.50% 4.25% 4.25% 4.00% 4.25% 4.50% 4.75% 4.75% Rate 5 yr Gilt 4.25% 4.00% 4.00% 4.25% 4.50% 4.75% 4.75% 4.75% 4.75% Yield 10 yr PWLB 4.50% 4.25% 4.50% 4.75% 4.75% 4.75% 4.75% 4.75% 4.75% Rate 25 yr PWLB 4.50% 4.50% 4.50% 4.50% 4.75% 4.75% 4.75% 5.00% 5.00% Rate Sector’s current interest rate view is that the base rate will:- Remain on hold at 4.5% until the end of Q1 2006 Fall to 4% by the end of Q4 2006 Edge up by 0.25% in Q1, Q2 and Q3 of 2007 to end the year at 4.75% The risk to this forecast is to the downside in as much as the cuts in rates could occur earlier than our forecast suggest, although this will not necessarily affect the timing of the first upward move in Q1 2007. Economic background 8 of 20 UK UK now in the downswing of the economic cycle. GDP growth to weaken from 3.2% in 2004 to about 1.7% in 2005 before rising to about 2% in 2006 Slowdown in household spending and rise in unemployment during 2005 House price inflation fallen to very low levels and may now stabilise Rise in inflation concerns; high oil prices have pushed inflation up over target – but this is a one off effect which will fall out even if oil prices remain at current levels Increasing concerns that the public sector deficit will exceed targets significantly and lead to increases in taxation International Boom in world commodity prices driven by strong growth in China and India; potential for further increases in prices but supply side increases and improvements in technology are likely to reduce prices in the medium term Inability of oil producers to spend their huge cash surpluses and reluctance of Asian economies to run current account deficits will suppress world demand and dampen world growth US – continuation of measured rate raising by the Fed coupled with concerns about rising inflation. Fed rate may now peak at 4.5% US GDP growth expected to weaken from 4.4% 2004 to 3.4% 2005 and 2.5% 2006 ECB had held repo rate at 2.00% since June 2003; increase in December to 2.25% but “this was not the first of a series of increases” European consumers lack confidence to increase their spending; GDP growth expected to rise weakly and to continue to under perform the UK and US economies 5.0 BORROWING REQUIREMENT As reflected in the current 5 year capital programme it is expected that there will be no capital borrowings required during 2006/07, 2007/08 or 2008/09. 6.0 ANNUAL INVESTMENT STRATEGY Investment Policy The Council will have regard to the ODPM’s Guidance on Local Government Investments (“the Guidance”) issued in March 2004 and CIPFA’s Treasury Management in Public Services Code of Practice and Cross Sectoral Guidance Notes (“the CIPFA TM Code”). The Council’s investment priorities are the security of capital and the liquidity of its investments. The Council will also aim to achieve the optimum return on its investments commensurate with proper levels of security and liquidity. The borrowing of monies purely to invest or on-lend and make a return is unlawful and this Council will not engage in such activity. Counterparty limits, list and maximum term The Council uses Fitch ratings together with Sectors’ investment matrix to establish its counterparty list and the maximum term for investments. See Appendix B and C We have a 2 tier limit to reflect the creditworthiness of an institution. This would give a limit of £3,000,000 for institutions with a long-term rating of AA- or better, and reducing the limit to 9 of 20 £2,000,000 for those with a long-term rating of A or A+. Where institutions reside within a group the group limit will be £500,000 more than the single institution limits. With regards to the term of investment the matrix makes a division between 3 months and 12 months only. Sector has confirmed that it is intended to be used as a guide. The Head of Finance has discretion to extend the 3 month term to 6 or 9 months for certain institutions if the cashflow forecast and rate of return dictate that this was the preferred term. The criteria for extending the term will be laid down in the Treasury Management Practices and Schedules. The Treasury management practices state that investments may be made for a period of up to 2 years. We have amended our practices so that investments can be made for a period of up to 5 years with counterparties that have a minimum long term rating of AA-. This matches Sectors’ matrix for lending longer that 364 days and would allow our investments to take advantage of interest rate cycles. The credit ratings used to assess the suitability of a counterparty are valid for a term of 5 years. The credit rating of a counterparty is checked on the day the funds are invested. The councils’ list is registered with Sectors’ on line creditworthiness service and the Council is alerted to changes in Fitch ratings via e-mail. If a downgrade results in the counterparty/investment scheme no longer meeting the Council’s minimum criteria, its further use as a new investment will be withdrawn immediately. Similarly if an upgrade results in an institution meeting our criteria then the name may be added to our list at the discretion of the Head of Finance. We have expanded our counterparties list to include overseas banks, the same credit ratings apply to these organisations as our current counterparties. Dealing Direct We will also seek better rates and investment options through dealing direct with institutions. We have a list of financial institutions that we could deal directly with, If they meet with our criteria as set out above we will make contact and use them directly if the rate, amount and term are more advantageous than dealing through our brokers. Investment Instruments Investment instruments identified for use in the financial year are listed below under the ‘Specified’ and ‘Non-Specified’ Investments categories. Specified Investments A specified investment is one which offers high security and high liquidity, and authorities are free to rely on such investments with minimal procedural formalities. All such investments must be in sterling and with a maturity of less than one year. Minimum ‘High’ Credit Use Criteria Term deposits – UK government n/a In-house Term deposits – other LAs n/a In-house Term deposits – banks and building Short-term F1, Long-term A, In-house societies Individual C, Support 2 Money Market Funds AAA In-house Non specified Investments: Non-Specified Investments have a greater potential risk and must set a limit to the overall amount that may be held in such an investment at any time in the year. We have set our maximum exposure in Non specified investments at 50% of total investments. This is to allow greater benefits in following interest rate cycles. We will expand our list of Non specified Investments to include, Multilateral development bank bonds and sovereign bonds which are both AAA rated investments. These additional types of investment are not currently 10 of 20 advantageous, however if excluded from our strategy could limit opportunities should market conditions change. Minimum Credit Use Max % of Max. Criteria total maturity investments period Term deposits – UK n/a In-house 50% 5 years government(with maturities in excess of 1 year) Term deposits – other LAs n/a In-house 50% 5 years (with maturities in excess of 1 year) Term deposits – banks and * Short-term F1+, In-house 50% 5 years building societies (with Long-term AA-, maturities in excess of 1 year) Individual B/C, Support 2 Certificates of deposits issued * Short-term F1+, In-house 50% 5 years by banks and building Long-term AA-, (with advice societies Individual B/C, from Sector) Support 2 UK Government Gilts with AAA In-house 50% 5 years maturities in excess of 1 year (with advice from Sector) Multilateral development bank AAA In-house 50% 5 years bonds and sovereign bonds (with advice from Sector) Investment Strategy All the councils’ funds are managed in house with reference to a detailed cash flow forecast on a daily basis for the current year and extending for 5 years on a monthly basis. A proportion of the portfolio, which is considered to be core cash, is invested for longer periods up to a maximum of five years with reference to cash flow requirements and the outlook for interest rates. To cover smaller short term movements Lloyds TSB Treasury Call account is used daily as required. In view of the lower rate on this type of account the balance is kept in the region of £250,000. Business Reserve accounts are used to secure better rates for funds required within the month, without losing instant access to the funds, hence minimising liquidity risk and maximising returns. A minimum balance of £1,000,000 is required with the Bank of Scotland Reserve account to earn a return equivalent to base rate and £500,000 with the Abbey Business Reserve to earn an annual return of base rate. We have also opened a Bank of Scotland base plus account. This account requires a 7 day notice period which reduces liquidity however provides a higher return of approx 0.07% above base rate. The additional risk of liquidity will be controlled by our detailed cashflow forecast. 11 of 20 Cash balances at the 1st April 2005 amounted to £15.5m and have steadily increased during the year peaking in January 2006 at £22.5m. The average daily balance for the year is expected to be in the region of £19.8m and the current forecast estimates the closing balance for the year to be around £18.4m. The Table below shows our investment portfolio at the 31st December 2005. Investment Counterparty Amount Rate Matures £’000 % Dexia BIL 1,000 4.84 05/01/06 Bradford & Bingley 2,000 4.55 01/02/06 Bristol & West Building Society 500 4.55 20/02/06 Dexia BIL 1,000 5.10 28/02/06 Skipton Building Society 1,000 4.54 01/03/06 Nationwide Building Society 1,000 5.11 06/03/06 Bank of Scotland 2,000 4.84 12/05/06 Bristol & West Building Society 2,000 4.65 02/06/06 Irish Intercontinental Bank Ltd 2,000 4.65 02/06/06 Nationwide Building Society 2,000 4.64 02/06/06 Dexia BIL 1,000 4.40 06/10/06 Northern Rock plc 2,000 4.655 15/11/06 Bank of Scotland Reserve Account 1,000 4.50 Abbey National Reserve Account 0 4.50 S106 Investments Amount £’000 Rate Matures Escrow – Spalding Energy 660 Lloyds TSB – Thornfields 462 4.39 16/01/06 Interest Rate Outlook and resulting strategy Our treasury advisor is forecasting base rates to be on a falling trend from 4.50% to reach 4.00% in Q4 2006 but to rise again to end 2007 at 4.25%. We should therefore seek to lock in longer period investments at higher rates before this fall starts for some element of their investment portfolio which represents their core balances. Some investment should be aimed to mature during Q1 2007 when the interest rate cycle turns up and the Market yield curve should have turned positive. This will enable the council to lock into higher yielding investments with their maturing deposits. For 2006/07 Sector have advised clients should budget for a cautious investment return of 4.0%. For our 2006/07 budgets we have used 4.5% to reflect the level of forward dealing we have been able to undertake. For its cash flow generated balances, the Council will seek to utilise its business reserve accounts and short-dated deposits (1-3 months) in order to benefit from re-investing interest earned. End of year Investment Report At the end of the financial year, the Council will report on its investment activity as part of its Annual Treasury Report. 7.0 OTHER ISSUES Reduction in RTB including pooling requirement With effect from 1 April 2004, the procedures for accounting for housing capital receipts changed. Prior to this date the whole of the receipt was retained by the Authority, although a proportion was required to be ‘set aside’ for debt repayments. After 1 April an amount equivalent to the ‘set aside’ was required to be paid over (pooled) to the Office of the Deputy Prime Minister (ODPM). The 12 of 20 amounts pooled with the ODPM are equivalent to 75% of net sales receipts for Right to Buy (RTB) sales and 50% of net receipts in respect of HRA land sales, although the latter is waived where receipts are earmarked for affordable housing. ODPM have allowed transitional arrangements in respect of pooling for Authorities who were ‘Debt Free’ as at 1 April by reducing the requirement to pool receipts by 75% in 2004/05, 50% in 2005-06 and 25% in 2006-07. The council took the opportunity to become ‘Debt Free’ in March 2004, and therefore is able to retain 81.25% of its RTB receipts in 2004-05, 62.5% in 2005-06 and 43.75% in 2006-07. 13 of 20 IMPLEMENTATION R – Responsible – Head of Finance is responsible for making sure things actually happen. A – Accountable – Chief Accountant and senior Treasury Officer will be making the day to day decisions. C – Consulted – Sector Treasury Services will be asked for their input and to conduct an annual review. I – Informed – the treasury team will be made aware of the new policy and what will change as a result MONITORING The policy will be monitored in the following ways: MONITORING ACTIVITY PERSON RESPONSIBLE Quarterly monitoring of Prudential Indicators Head of Finance Current Treasury position, cashflow monitoring Chief Accountant and Senior Treasury Officer including investment income Economic Forecasts Chief Accountant and Senior Treasury Officer Treasury Health Check Sector Treasury Function Audit / HOF Key Performance Indicators Senior Treasury Officer Deputy Chief Accountant POLICY CONSULTATION The Strategy is part of the Council’s budget and policy framework. POLICY APPROVAL Full Council RELATED POLICIES & STRATEGIES Treasury Management Practices and Schedules TMP 1 : Treasury Risk Management TMP 2 : Best value and Performance Measurement TMP 3 : Decision–making and Analysis TMP 4 : Approved instruments, methods and techniques TMP 5 : Organisation, clarity and segregation of responsibilities, and dealing arrangements TMP 6 : Reporting requirements and management information arrangements TMP 7 : Budgeting, accounting and audit arrangements TMP 8 : Cash and cash flow management TMP 9 : Money laundering TMP 10 : Staff training and qualifications TMP 11 : Use of external service providers TMP 12 : Corporate governance 14 of 20 Medium Term Financial Strategy Financial Plan Treasury Policy March 2002 Constitution Anti-Fraud Policy and Anti-Fraud and Corruption Strategy Corporate Debt Policy Corporate Charging Policy 15 of 20 INTEREST RATE FORECASTS The data below shows a variety of forecasts published by a number of institutions. The first three are individual forecasts including those of Sector, UBS and Capital Economics (an independent forecasting consultancy). The final one represents summarised figures drawn from the population of all major City banks and academic institutions. The forecast within this strategy statement has been drawn from these diverse sources and officers’ own views. 1. INDIVIDUAL FORECASTS Sector View interest rate forecast – 18 October 2005 Q/E4 Q/E1 Q/E2 Q/E3 Q/E4 Q/E1 Q/E2 Q/E3 Q/E4 2005 2006 2006 2006 2006 2007 2007 2007 2007 Base Rate 4.50% 4.50% 4.25% 4.25% 4.00% 4.25% 4.50% 4.75% 4.75% 5yr Gilt Yield 4.25% 4.00% 4.00% 4.25% 4.50% 4.75% 4.75% 4.75% 4.75% 10 yr PWLB 4.75% 4.50% 4.25% 4.50% 4.75% 4.75% 4.75% 4.75% 4.75% rate 25 yr PWLB 5.00% 4.50% 4.50% 4.50% 4.50% 4.75% 4.75% 4.75% 5.00% rate Capital Economics interest rate forecast – 22 December 2005 Q/E4 Q/E1 Q/E2 Q/E3 Q/E4 Q/E1 Q/E2 Q/E3 Q/E4 2005 2006 2006 2006 2006 2007 2007 2007 2007 Base Rate 4.50% 4.25% 4.00% 4.00% 4.00% 4.00% 4.00% 4.00% 4.00% 5yr gilt 4.20% 4.10% 4.00% 3.90% 3.80% 4.00% 4.10% 4.30% 4.40% yield 10 yr PWLB 4.35% 4.25% 4.15% 4.25% 4.35% 4.15% 4.75% 4.85% 4.75% rate 25 yr PWLB 4.35% 4.25% 4.25% 4.35% 4.45% 4.45% 4.55% 4.65% 4.65% rate 16 of 20 UBS Economic interest rate forecast (for quarter ends) – October 2005 Q/E4 Q/E1 Q/E2 Q/E3 Q/E4 Q/E1 2005 2006 2006 2006 2006 2007 Base Rate 4.50% 4.50% 4.50% 4.75% 4.75% 4.75% 10 yr PWLB 4.67% 4.70% 4.80% 4.85% 4.90% - rate 25 yr PWLB 4.78% 4.85% 4.87% 4.95% 5.00% - rate 2. SURVEY OF ECONOMIC FORECASTS HM Treasury – December 2005 summary of forecasts of 26 City and 14 academic analysts for Q4 2005 and 2006. (2007 – 2009 are as at November 2005 but are based on 18 forecasts) annual average repo Repo Quarter ended rate Q4 Q4 ave. ave. ave. 2005 2006 2007 2008 2009 Indep. forecasters 4.50% 4.49% 4.29% 4.39% 4.54% 4.60% BoE Base Rate Highest base 4.50% 4.55% 5.00% 5.40% 5.90% 6.20% rate Lowest base 4.50% 4.20% 3.50% 3.75% 3.75% 3.75% rate 17 of 20 APPENDIX B Lending up to 364 days to banks and building societies Based on Fitch ratings Short-term rating F1+ Long-term rating : AAA, AA+, AA, AA- Individual Support 1 2 3 4 A A/B B B/C C C/D D Short-term rating F1 Long-term rating : A+, A Individual Support 1 2 3 4 A A/B B B/C C C/D D Banks 364 days 3 months Note: An institution’s fitch rating in each of the four areas – short term, long term, individual and support is matched with the matrix. If the box is shaded this dictates that they may be included on our counterparty list and the type of shading recommends the maximum term for the investment. 18 of 20 APPENDIX C Lending longer than 364 days (where permitted) Short-term rating F1+ Long-term rating : AAA, AA+, AA Individual Support 1 2 3 4 A A/B B B/C C C/D D Short-term rating F1+ Long-term rating : AA- Individual Support 1 2 3 4 A A/B B B/C C C/D D Between 1 and 2 years, between 1 and 5 yrs 19 of 20 Rating definitions International Long – Term Credit AAA Highest credit quality Rating AA Very high credit quality A High credit quality Rating Outlook + Rating is likely to move upwards over a 1 or 2 year period - Rating is likely to move downwards over a 1 or 2 year period None Rating is likely to remain stable over a 1 or 2 year period International Short-term Credit Rating F1 Highest credit quality. “+” may be – Emphasis on liquidity and ability to added to denote an exceptionally meet financial commitments within 12 strong credit feature months Individual Rating – assesses how a A A Very strong bank probably with bank would be viewed if it were entirely outstanding profitability and balance independent and could not rely on sheet integrity external support taking into account its exposure to, and appetite for management of risk B A strong bank, with no major concerns C An adequate bank, which possess one or more troublesome aspects Support Ratings 1 A bank with extremely high probability of external support. The potential supplier of support is very highly rated in its own right. 2 A bank for which there is a high probability of external support. The potential supplier of support is highly rated in its own right. 3 A bank for which there is a moderate probability of support because of uncertainties about the ability or propensity of the potential provider of support to do so. 20 of 20