High interest rates cause £693m borrowing headache for Lancashire County Council

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Lancashire County Council says it will try to “minimise” its borrowing until interest rates have stabilised.

It comes as the authority is faced with deciding how best to borrow the £693m it estimates it will need during the 2025/26 financial year. The majority of that total is the result of maturing loans which will need refinancing in the near future.

A five-year bond worth £350m – issued by the county council back in 2020 – is due to mature in March, leaving a £291m borrowing requirement remaining. A further £350m worth of loans will also come to maturity in the year thereafter.

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The money needing to be borrowed is for so-called ‘capital expenditure’ – investment in new or upgraded assets, as opposed to day-to-day spending.

Lancashire County Council needs to refinance £641m worth of loansLancashire County Council needs to refinance £641m worth of loans
Lancashire County Council needs to refinance £641m worth of loans

The authority’s audit, risk and governance committee was told financing costs were higher than had been hoped for at this point in the process of arranging new borrowing.

“We were expecting interest rates to be further along the curve of coming down,” Noel O’Neill, the county council’s interim director of finance and commerce, said.

“That’s not materialised, so we’ve got some challenges around what we do [in the] short-term.”

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The Bank of England base rate currently stands at 4.75 percent, slightly down from a 15-year high of 5.25 percent for almost 12 months from August 2023. County Hall’s treasury advisors have forecast it will fall to 3.75 percent by November.

Against that backdrop, Khadija Saeed, head of corporate finance at the authority, said it was necessary to be “as flexible as we can, whilst not running the risk of unplanned or unexpected interest rate rises”.

She added: “It’s important that we do fix an element [of borrowing costs] even if we feel like rates are elevated.

“While interest rates could come down, they’re not guaranteed – but we’re working on that assumption, so we expect some of our borrowing to be variable [rate].

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“Our general approach will be to try and minimise borrowing as far as possible until we feel rates have stabilised.”

The committee meeting heard the county council was likely to turn to the Treasury’s PWLB lending facility – formerly the Public Works Loans Board – for some of the money it needs to borrow, rather than issuing a new bond.

The £350m bond maturing in March was issued through the UK Municipal Bond Agency, which Lancashire County Council became the first local authority to use in 2020. However, a report presented to the committee stated that a fall in the cost of PWLB borrowing since then had eradicated the “main advantage” of using the UKMBA this time around.

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