The updated Prudential Code will make it more difficult for local authorities to counteract the effects of inflation, reducing the “real” value of reserves, according to the director of investments at Lancashire County Council.
Mike Jensen told Room151 that there is currently a mismatch between inflation and short-term interest rates – with the Consumer Prices Index (CPI) rising by 5.5% in the year to January and the official bank rate set at 0.5%.
But he said the Prudential Code makes it difficult for councils to justify longer-term, fixed-income investments to help protect the real value of reserves.
“The code now makes it very difficult to invest in fixed-income funds, credit funds, infrastructure funds, property funds or equity funds. I wouldn’t say they get ruled out by the code, but it makes them very difficult to justify.”
The revised code, which guides capital borrowing by local authorities, was published by CIPFA in January. It was given a guarded welcome for having stepped back from earlier proposals that had led to concerns about a “fire sale” of local authority commercial investment properties.
But Jensen claimed the previous version of the code was “very, very extreme”, while the updated version “is just extreme”.
He added: “The big thing that the Prudential Code was created to deal with – some of the more aggressive actions of small local authorities in the commercial property market – it will have dealt with. But what the collateral damage will be is difficult to know just yet.”
22 March 2022
The Marriott Hotel, Leeds
LATIF North
Lead sponsor: CCLA
Qualifying finance officers can register free of charge here
Jensen will be speaking at Room151’s Local Authority Treasurers Investment Forum (LATIF) North on 22 March in Leeds, where there will be a dedicated session examining whether the Prudential Code has gone too far.
Speakers in this session include: Victoria Bradshaw, chief financial officer, Leeds City Council; Mel Creighton, deputy chief executive and director of finance and resources, Liverpool City Council; Danny Mather, head of corporate finance, Warrington Borough Council; and Dan Bates, finance specialist, LG Improve.
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