Treasury management strategy report 2016-17

Part of the service provided by our advisors is to assist us to formulate a view on interest rates. The following information gives the current provider’s central view:

PWLB Borrowing Rates percentage (including certainty rate adjustment)

March 2016 (bank rate 0.5%)

• 5 year 2.00%

• 10 year 2.60%

• 25 year 3.40%

• 50 year 3.20%

September 2016 (bank rate 0.5%)

• 5 year 2.20%

• 10 year 2.80%

• 25 year 3.50%

• 50 year 3.50%

March 2017 (bank rate 0.75%)

• 5 year 2.40%

• 10 year 3.00%

• 25 year 3.70%

• 50 year 3.50%

September 2017 (bank rate 1.0%)

• 5 year 2.60%

• 10 year 3.20%

• 25 year 3.80%

• 50 year 3.70%

March 2018 (bank rate 1.25%)

• 5 year 2.80%

• 10 year 3.40%

• 25 year 4.00%

• 50 year 3.90%

September 2018 (bank rate 1.5%)

• 5 year 3.00%

• 10 year 3.60%

• 25 year 4.10%

• 50 year 4.00%

March 2019 (bank rate 1.75%)

• 5 year 3.20%

• 10 year 3.70%

• 25 year 4.10%

• 50 year 4.00%

Economic situation (as supplied by Sector Treasury Services Ltd)

UK GDP growth rates in of 2.2% in 2013 and 2.9% in 2014 were the strongest growth rates of any G7 country; the 2014 growth rate was also the strongest UK rate since 2006 and the 2015 growth rate is likely to be a leading rate in the G7 again. However, quarter 1 of 2015 was weak at +0.4%, although there was a short lived rebound in quarter 2 to +0.7% before it subsided again to +0.5% (+2.3% y/y) in quarter 3. The Bank of England's November Inflation Report included a forecast for growth to remain around 2.5% – 2.7% over the next three years. For this recovery, however, to become more balanced and sustainable in the longer term, it still needs to move away from dependence on consumer expenditure and the housing market to manufacturing and investment expenditure. The strong growth since 2012 has resulted in unemployment falling quickly to a current level of 5.3%.

The MPC has been particularly concerned that the squeeze on the disposable incomes of consumers should be reversed by wage inflation rising back above the level of CPI inflation in order to underpin a sustainable recovery. It has, therefore, been encouraging in 2015 to seewage inflation rising significantly above CPI inflation which has been around zero since February. The Inflation Report was notably subdued in respect of the forecasts for CPI inflation; this was expected to barely get back up to the 2% target within the 2-3 year time horizon. However, once the falls in oil, gas and food prices over recent months fall out of the 12 month calculation of CPI, there will be a sharp tick up from the current zero rate to around 1% in the second half of 2016. Indeed, the increase in the forecast for inflation at the three year horizon was the biggest in a decade and at the two year horizon it was the biggest since February 2013. Nevertheless, despite average weekly earnings ticking up to 3.0% y/y in the three months ending in September, this is unlikely to provide ammunition for the MPC to take action to raise bank rate in the near future as labour productivity growth has meant that net labour unit costs appear to be rising by about only 1% y/y. Having said that, at the start of October, data came out that indicated annual labour cost growth had jumped sharply in quarter 2 from +0.3% to +2.2%: time will tell if this is just a blip or the start of a trend.

There is, therefore, considerable uncertainty around how quickly inflation will rise in the next few years and this makes it difficult to forecast when the MPC will decide to make a start on increasing bank rate. There are also concerns around the fact that the central banks of the UK and US currently have few monetary policy options left to them given that central rates are near to zero and huge QE is already in place. There are, therefore, arguments that they need to raise rates sooner, rather than later, so as to have some options available for use if there was another major financial crisis in the near future. But it is unlikely that either would raise rates until they are sure that growth was securely embedded and ‘noflation’ was not a significant threat.

The forecast for the first increase in bank rate has, therefore, been pushed back progressively during 2015 from Q4 2015 to Q2 2016 and increases after that will be at a much slower pace, and to much lower levels than prevailed before 2008, as increases in bank rate will have a much bigger effect on heavily indebted consumers than they did before 2008.

The government’s revised budget in July eased the pace of cut backs from achieving a budget surplus in 2018-19 to achieving that in 2019-20.