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The Treasury’s decision to increase Public Works Loan Board (PWLB) interest rates is “credit negative” for local authorities, credit rating agency Moody’s has warned.
The government has raised the cost of new borrowing from the PWLB – councils’ main source of finance – by 1% with immediate effect.
Moody’s said the move would be “credit negative” and “increase local authorities’ cost of capital on new borrowing in the short term” as they push ahead with plans for housing and other infrastructure.
The Local Government Association has claimed that council housebuilding projects may have to be cancelled as a result of the interest rise.
But Moody’s said it does not expect councils “to cancel or postpone the majority” of projects which fulfil statutory duties including housing.
However, the agency did say that these higher costs “may deter the take-up of commercial risk” over the longer term.
Some councils have invested heavily in purchasing commercial property such as shopping centres aided by historically low borrowing costs, with this activity understood to be behind Treasury’s decision to raise PWLB rates.
Moody’s said commercial property projects are “risky” for councils “since they are predominantly 100%-debt funded and increase their exposure to economic volatility”.
Local authorities had borrowed £9.6bn from the PWLB up to September 2019 – more than the £7.5bn taken for the whole of 2018.
Standard PWLB rates are now 180 basis points above gilts – the government cost of borrowing – up from 80 basis points.
Moody’s said it expects the PWLB to remain councils’ main source of finance despite the increase.
But it added: “Nevertheless, the higher cost may increase demand for financing from other sources, including capital markets.”
It noted that the PWLB “significantly mitigates any liquidity risk” that councils may face by using terms which make it their responsibility to ensure they are not acting unlawfully by taking out loans.