Inter-local authority (LA) lending rates have surged recently, reflecting the broader shifts in the financial landscape and the seasonal cash flow cycles typical of local authorities. This spike has been accompanied by a marked increase in Public Works Loan Board (PWLB) borrowing, as councils seek to manage short-term cash flow pressures. However, with interest rates evolving, there is a strong case for reviewing debt strategies, particularly the balance between short and long-term borrowing.
Spike in Inter-LA Rates and Seasonal Borrowing Trends
Inter-LA rates have risen sharply, with some deals now priced above 6%, or at SONIA (Sterling Overnight Index Average) plus 150 basis points. This reflects heightened demand for liquidity at year end and is at odds with short-term rates that are pricing in further bank rate reductions.
Re-evaluating Short vs. Long-Term Borrowing
While many local authorities have concentrated on securing one-year PWLB borrowing to capitalise on perceived short-term rate advantages, there is a compelling argument to consider longer-term rates. Market pricing dynamics suggest that longer-term rates are likely to hit their floor well before Bank Rate itself begins to decline. This is because markets typically anticipate Bank Rate movements in advance, adjusting long-term rates accordingly.
Locking in longer-term rates now provides cost certainty versus budget forecasts, reducing exposure to the volatility of future rate changes. It also offers protection against the risk of higher rates if inflationary pressures or geopolitical uncertainties persist.
A Balanced Approach to Debt
A balanced approach to debt management has proven effective for many local authorities. Over the past few months, several councils have opted to lock in 10-year Equal Instalment of Principal (EIP) debt to spread refinancing risk and reduce overall interest rate exposure. This approach helps smooth out the maturity profile, providing greater budgetary control and reducing vulnerability to future rate spikes.
Additionally, drawing down debt in stages has been an effective strategy for managing recent market volatility. By staggering drawdowns, authorities have been able to iron out rate fluctuations, reducing the impact of sudden market shifts. This measured approach has provided a buffer against unpredictable rate movements while maintaining flexibility in financing strategies.
Balancing Peer Borrowing and Rate Exposure
Despite the advantages of longer-term borrowing, there remains a role for inter-LA loans as part of a diversified debt strategy. Inter-LA rates are expected to decline to below 4% over the next year, making them an attractive option for some authorities seeking flexibility and lower costs. However, exposure to short-term rates should be carefully managed, taking into account the authority’s financial strength, risk appetite, and projected interest rate exposure. Striking the right balance between short and long-term debt will be key to optimising financing costs and managing future rate uncertainty.
Implementing a Clear Strategy
A clear and structured debt strategy is essential for navigating the current market environment effectively. Key elements of a robust strategy include:
Conclusion
Local authorities face a complex rate environment, with rising inter-LA rates and shifting PWLB dynamics reshaping borrowing decisions. While shorter-term borrowing may seem appealing, the prospect of longer-term rates bottoming out ahead of the Bank Rate drop presents a strategic opportunity to lock in cost certainty. A balanced approach, combining longer-term PWLB funding with carefully managed short-term inter-LA borrowing, supported by a clear debt strategy will help authorities maintain financial stability and budget control amid ongoing market volatility.
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