CCLA Blog: Low interest rates and the impact on councils

CCN Blogs, CCN News 2021 | 26 February 2021

Amid the events of 2020, a further reduction in the interest on councils’ savings at the bank, building society or National Savings and Investments (NS&I) may well have gone unnoticed. Initially, at least.

Savings rates were already near historic lows, and those who depend on their savings’ income will have winced when further reductions hit home. Savings rates, and indeed the income paid by money market funds like CCLA’s Public Sector Deposit Fund (PSDF), have dropped since the start of the pandemic. Councils need to exercise caution when investing their short-term cash. It is of fundamental importance to keep their sights firmly on objectives such as security, diversification, and liquidity, despite the temptation to seek higher returns.

What is behind the low rates of interest paid on savings?

When the Bank of England (BoE) cut interest rates, it was steeling the economy for the current downturn. Its’ main instrument to do so was through the Bank Rate, the single most important interest rate in the UK. Set by the BoE’s monetary policy committee, it is a tool which tackles inflation and drives growth by adjusting the balance of what we, as a country, are spending versus what we save. The Bank Rate determines the interest rate which the BoE pays commercial banks in return for their deposits. It is the feeder rate for banks, who in turn charge people to borrow money or pay savers on their bank deposits. It has the same sway over sterling money markets, where the PSDF

makes its investments.

Last March, the BoE reduced the Bank Rate twice, by a total of 65 basis points to 0.10% from 0.75%. It currently stands at the record low. Many high street banks immediately reduced their rates to reflect the move.

As ultra-low interest rates will likely persist, what options are left for local councils?

First and foremost, councils should maintain their focus on security, diversification, and liquidity.

With interest rates near zero, any stellar opportunities for generating returns on cash deposits without adding risk are scant. By giving up security and diversity, the potential for losing some or all of the cash deposited will increase markedly. Councils must question whether taking on this extra risk offers greater relative rewards, or whether it might be better to live with a tiny bit less interest. Given the economic picture and the huge amount of uncertainty which persists, the level of risk to which depositors are exposed is far higher than usual. That is why councils need to be confident about where their cash is housed.

The PSDF is a UK-domiciled money market fund. Its prime objective is the preservation of principal and liquidity by investing in a diversified portfolio of high-quality sterling deposits and instruments. Councils can take further comfort from the fact that the PSDF has been awarded the strongest AAAmmf rating from Fitch Ratings. This reflects its adherence to strict regulatory rules ensuring diversity and liquidity. It is this focus which comes first in CCLA’s management of the PSDF and it is why councils can be sure that their investments benefit from CCLA’s low-risk approach. There may be opportunities to earn additional income on medium to long term investments if the authority has cash or reserves which can be set aside for a longer period.

CCLA has the same values and principles as its clients. In a world of uncertainty, councils can take additional comfort in our active stewardship programme which seeks to push for improvement in the companies we invest.

For more information, click here.