• Home
  • About
  • Subscribe
  • LATIF
  • Conferences
  • Dashboard
  • Edit My Profile
  • Log In
  • Logout
  • Register
  • Edit this post

Room 151

  • 151 BRIEF

    What's New?

  • Inflation ‘biggest concern for LGPS professionals’

    May 20, 2022

  • LGA calls for government support as regulators face staffing issues

    May 19, 2022

  • WMCA signs £4bn investment agreement with L&G

    May 18, 2022

  • Bill will give UK Infrastructure Bank power to lend directly to councils

    May 18, 2022

  • £400bn pension group collaborates on climate transition initiative

    May 17, 2022

  • CIPFA rejects proposal for vote on publication of fraud hub report

    May 17, 2022

  • Treasury
  • Technical
  • Funding
  • Resources
  • LGPS
  • Development
  • 151 News
  • Blogs
    • David Green
    • Agent 151
    • Dan Bates
    • Richard Harbord
    • Stephen Sheen
    • James Bevan
    • Steve Bishop
    • Cllr John Clancy
    • David Crum
    • Graham Liddell
    • Ian O’Donnell
    • Jackie Shute
  • Interviews
  • Briefs

Inflation spike creates watching brief for treasury officers

0
  • by Gavin Hinks
  • in Blogs · Treasury
  • — 24 Jun, 2021

Bank of England: Photo by Etienne Martin on Unsplash

A recent rise in inflation has local government treasury leaders thinking about interest rates, writes Gavin Hinks.

Should local government be worried about rising inflation? The increasingly shrill reports about climbing rates has experts thinking hard about the implications. Some see little to worry about. Others see more uncertainty and say council treasurers appear to be entering a period in which the the usual financial elements behave counter to expectations.


16 September 2021
London Stock Exchange or ONLINE
13th Local Authority Treasurers’ Investment Forum
Room151’s flagship annual conference. Free attendance for local government treasurers and section 151 officers.
Lead sponsor CCLA
Public sector treasurers can register here


According to David Green, startegic director at Arlingclose, the development of inflation is a factor that demands vigilance: “CIPFA added inflation risk back into the treasury management code in 2017 and it is definitely something worth keeping an eye on.”

Inflation is without doubt climbing. The Office for National Statistics revealed earlier this month that consumer price inflation has hit 2.1%, busting through the Bank of England’s target. The ONS says the number was driven higher by rising prices for clothing, fuel, games and media gadgets, and eating out. The biggest upward pressure was transport.

Menawhile in May the UK Puchasing Manager’s Index (PMI) reached, 65.6, it’s highest level ever—and a result of rising costs for raw materials—before falling back to 64.2, lower but still beating all other previous measures.

The implications for local government are much like consumers: goods and services may become more expensive. But treasurers will also be concerned about the implications for interest rates. Unnerving levels of inflation could prompt the Bank of England to take action. This would, of course, affect both savings and investments, on the one hand, and borrowing on the other.

But observers say the inflation and interest rate picture is complicated by other factors. PWLB loans at variable and “new loan” rates currently stand at less than 2%, a level some would consider prime for borrowing. But there appears to be something else going on. PWLB borrowing seems to have tapered off. The rise from 2020 to 2021 is a mere £100m (from £85.6bn to £85.7bn). In contrast, from 2019 to 2020 borrowing rose £8.2bn.

Cash holdings

Meanwhile, figures out this week from the Ministry of Housing, Communities and Local Government (MHCLG) show that councils appear to be holding large amounts of cash. Investments, according to MHCLG, stand at £50bn, at March this year, up from £46.5bn last year, and £40.3bn in 2019. During the previous four years total investments hovered around the £37bn mark.

Explanations for this vary. Some of the money could be Covid relief funds still to be distributed. Other observers wonder whether that can be the case at this point in the pandemic: much of the crisis cash shoold have been passed on already. Another explanation is the cash reservoir could be boosted by capital funds unspent during the last year because Covid-19 forced projects to come to a standstill.  At this point in time experts say the picture is unclear.

So, funds at PWLB are cheap, but borrowing seems to have dropped off significantly. There’s also evidence that spending on big ticket property deals—a significant driver of council borrowing—has fallen off. Figures show spending on land and property has dropped off 42% from £4.3bn in 2019-20 to a “provisional outturn” of £2.5bn by March this year. This may be largely due to a clampdown by HM Treasury to cut borrowing for yield.

With all these development underways treasury officers may also be concerned to see if the current inflation spike is baked in. In other words, is the current inflation elevation “transitory” or on the way to being embedded in the economy?

“Inflation will be higher currently due to the base effects of commodity and price reductions last year during the pandemic,” one expert tells Room151, “but will these factors fall out of the year-on-year calculation of CPI next year?”

Some see the inflation as less problematic. David Green says: “The MPC (Monetary Policy Committee) is likely to see post-Covid inflation as a one-off that corrects itself naturally without any need for interest rate rises.” The evidence, he says, is that back in 2008, after the financial crisis, inflation was allowed to rise to 5.2% without a compensating rise in rates.

Even so, the treasury runes seem difficult to divine. Treasurers will be concerned about the influence of inflation on gilt yields and what impact they may have on local authority borrowing. David Green adds that PFI contracts and pensions may be linked to inflation while fixed rate loans and minimum revenue position on past capital expenditure is “completly unaffected”. There is still room for caution.

“Councils should assess what their real inflation exposure is and how they can build treasury management portfolios to help manage inflation risk,” Green says.

Photo by Etienne Martin on Unsplash

—————

FREE monthly newsletters
Subscribe to Room151 Newsletters

Room151 Linkedin Community
Join here

Monthly Online Treasury Briefing
Sign up here with a .gov.uk email address

Room151 Webinars
Visit the Room151 channel

 

Share

You may also like...

  • Understanding climate risks in short-dated bonds 24th Sep, 2021
  • Making sense of climate risk reporting for LGPS 2nd Mar, 2021
  • Stewardship of public funds: the way forward 18th Feb, 2022
  • Richard Harbord: What will happen with business rates? 30th Nov, 2021

Leave a Reply Cancel reply

You must be logged in to post a comment.

  • Register to become a Room151 user

  • Latest tweets

    Room151 20 mins ago

    Investing today: nowhere to hide: Partner Content: Alex Stanley from Ardea Investment Management suggests that investors have few places to hide amid a synchronised sell-off in both bonds and equities. However, there are catalysts that[...] dlvr.it/SQlNVC pic.twitter.com/KkGGnduzPL

    Room151 21 hours ago

    Treasury to restrict PWLB loans to councils at risk of non-repayment: The Treasury has released new guidance that restricts local authorities’ access to Public Works Loan Board (PWLB) advances if there is a “more than negligible risk” of a council’s… dlvr.it/SQhLTV pic.twitter.com/vBsS7xMJdb

    Room151 21 hours ago

    Mixed reaction to proposed government intervention powers: There has been a mixed reaction to the government’s legislative plans to strengthen its intervention powers over local authority finances. The Levelling Up and Regeneration Bill has proposed… dlvr.it/SQhLMB pic.twitter.com/50foWxpPGs

    Room151 22 hours ago

    Post-Brexit struggles for national and local government regulators. @LGAcomms @NAOorguk Click the link below to read 🔻🔻 room151.co.uk/brief/lga-call… #Brexit #government pic.twitter.com/s3c8ySGy5G

    Room151 1 day ago

    CIPFA: a question of transparency: Roman Haluszczak’s campaign for publication of the independent report into the collapse of CIPFA’s London Counter Fraud Hub has been rejected again by the institute. He is now calling for[...] dlvr.it/SQgC5V pic.twitter.com/08fWsHFF4g

    Room151 2 days ago

    Back to the future for the PWLB: The Public Works Loan Board is tightening its lending criteria to ensure that loans will be repaid by local government borrowers. But, asks Peter Findlay, shouldn’t they have been doing[...] dlvr.it/SQcmmm pic.twitter.com/bVv4fe0Xlv

    Room151 2 days ago

    Great piece from Peter Findlay on the PWLB’s tightening of its lending criteria. He raises some pointed questions for the Treasury and explains why the ‘casino council’ characterisation was simplistic and inaccurate. #PWLB #localgov room151.co.uk/treasury/back-…

    Room151 2 days ago

    The Queen's speech highlighted the need for accelerating UK infrastructure investment into levelling up projects and cutting emissions. @UKInfraBank #QueensSpeech #ClimateAction #emissions Click the link below to read 🔻🔻 room151.co.uk/brief/bill-wil… pic.twitter.com/hFmF2veVIa

    Room151 2 days ago

    Huge funding heading to the @WestMids_CA from @landg. @andy4wm #LevellingUp #netzero #regeneration Click the link below to read 🔻🔻 room151.co.uk/brief/wmca-sig… pic.twitter.com/ajhZhia6mx

    Room151 2 days ago

    LGPS governance, Cagney and Lacey style: What regulatory response can be expected following the publication of the Good Governance project’s Phase 3 report and the closure of the Single Code of Practice consultation? Susan Black offers[...] dlvr.it/SQbfXf pic.twitter.com/xwqHOEu2AP

    Room151 3 days ago

    More evidence of the importance of emerging markets in the journey to net-zero. @BordertoCoast @BrunelPP @northernlgps @EAPensionFund @WYPF_LGPS Click the link below to read 🔻🔻 #LGPS #NetZero #NetZeroCarbon #EmergingMarkets room151.co.uk/brief/400bn-pe… pic.twitter.com/qCm0EGxzLn

    Room151 1 week ago

    ‘Urgent consultation’ issued in response to continuing audit delays: CIPFA and the Local Authority Scotland Accounts Advisory Committee (LASAAC) have announced another “urgent consultation” to consider proposals to address the latest issue that has led… dlvr.it/SQJ0kV pic.twitter.com/s6vw0bnGXO

    Room151 1 week ago

    Bags of capacity – now to housing delivery: HRAs have been freed up and councils are starting to invest, but some remain cautious, writes Steve Partridge. He suggests that a minimum of £10bn of additional borrowing could be[...] dlvr.it/SQDvxk pic.twitter.com/yZmoWzHv6U

  • Categories

    • 151 News
    • Agent 151
    • Audit
    • Blogs
    • Business rates
    • Chris Buss
    • Cllr John Clancy
    • Council tax
    • Dan Bates
    • David Crum
    • David Green
    • Development
    • Education
    • Forum
    • Funding
    • Governance
    • Graham Liddell
    • Housing
    • Ian O'Donnell
    • Infrastructure
    • Interviews
    • Jackie Shute
    • James Bevan
    • Jobs
    • Levelling up
    • LGPS
    • Mark Finnegan
    • Net Zero
    • Private markets
    • Recent Posts
    • Regulation
    • Resources
    • Responsible investing
    • Richard Harbord
    • Risk management
    • Social care
    • Stephen Fitzgerald
    • Stephen Sheen
    • Steve Bishop
    • Technical
    • Transport
    • Treasury
    • Uncategorized
    • William Bourne
  • Archives

    • 2022
    • 2021
    • 2020
    • 2019
    • 2018
    • 2017
    • 2016
    • 2015
    • 2014
    • 2013
    • 2012
    • 2011
  • Previous story Does local government need a new red flag system to signal looming financial crisis?
  • Next story Don’t let council-owned companies spin out of control

© Copyright 2022 Room 151. Typegrid Theme by WPBandit.

0 shares