Rate cut unlikely to encourage more council borrowing for development
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Mark Carney, governor of the Bank of England. Photo: Bank of England
A reduction in borrowing costs resulting from Brexit would be unlikely to spark a new wave of capital investment by local authorities, according to leading sector figures.
The Bank of England’s Monetary Policy Committee is due to meet on 14 July, with many expecting that base rates could be reduced to 0.25% – with one school of thought believing it may act earlier.
But many in the sector believe that a downturn in UK economic growth could provide a counterweight to the temptation to take advantage of borrowing to fund new infrastructure projects.
David Green, client director at treasury adviser Arlingclose, said: “Cheaper borrowing, with all other things being equal, should make local authority capital projects more affordable.
“However, all other things are not equal – the same expected economic slowdown is also likely to reduce the income available to local authorities to meet future loan repayments, be that rents, council tax or business rates.
“So the net affordability of projects may not be much different than before the referendum.”
Chris Buss, director of finance at London Borough of Wandsworth, said: “To be honest, borrowing is already very cheap and I don’t think an extra quarter per cent base rate cut will make much of a difference.
“Whatever you borrow, you still have to find revenue provision to pay for the interest payments.”
However, he said that the cut might help councils wishing to refinance existing debt taken out at higher lending rates.
Phil Triggs, strategic finance manager (pension fund and treasury) at Surrey County Council, said that the continued fall in interest rates was likely to make short-term borrowing more attractive.
He said: “We had already revised our treasury management strategy to provide for shorter term borrowing over the short term. The Brexit vote only enhances our reasons for doing this.
“We are in a historic period of low interest rates. Even though long-term money is also at a historical low, rates just keep going lower and lower. It is difficult to anticipate when the lowest point will be at the moment.
“Also, by borrowing short-term via the money markets in a lower for longer environment, we are saving a considerable amount of money on debt interest.”
Worries have also been raised that Brexit could cut off one option for council borrowing – the European Investment Bank (EIB).
The UK government has a 16.11% shareholding in the EIB, which could be up for negotiation as part of the Brexit withdrawal talks with the European Union.
A statement from the EIB said: “The United Kingdom will remain a shareholder of the EIB unless and until any decision to change the shareholder structure is taken by the EU member States.
“This will likely be discussed as part of the agreement on the UK’s withdrawal from the EU.
“The EIB’s engagement to support investment in the UK will not change unless and until a decision to change lending activity is taken by the EIB’s shareholders.”
It confirmed that existing loans, including a £100bn debt deal with UK housing associations announced earlier this year, would be honoured.
Aidan Brady, chief executive of the Municipal Bonds Agency, told Room151 that he hoped that the Brexit vote would not lead to the withdrawal of EIB funding to UK public bodies.
He said: “My views on EIB are the same as they were last Thursday. I would hope that we would have a role in helping to distribute their lending to local authorities.”
