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Councils gain from higher rates

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Cash-rich councils are being insulated from the impact of rising costs thanks to an increase in lending rates fuelled by the Lehman Brothers crash.

This week, authorities have been able to secure a 5.98% one-year interest rate by lending money to banks and building societies.

This interest rate is more than 100 basis points higher than councils were typically able to get before the onset of the credit crunch a year ago. By lending for three years, councils are currently able to fetch interest rates of between 5.3% and 5.6%.

Local authorities are able to benefit from the increased rates because they are among a dwindling number of institutions with access to cash surpluses and are able to lend to the money markets.

The reluctance of mainstream financial institutions to lend to one another has been compounded by Lehman Brothers' bankruptcy.

“Councils have an important role in the market because of the credit crunch. If they are cash rich, they are getting a windfall from the credit crunch,” said David Ingram, a manager at finance house Tradition .

“Every local authority is able to get 75 to 100 basis points more than it would in a normal market,” he added.

Mr Ingram estimated that between 80% and 90% of local authorities would be in a position to benefit from the favourable rates as they have temporary cash surpluses. Roughly one sixth are better placed because they have substantial reserves.

David Wood, honorary secretary for the Society of District Council Treasurers, said the increased rates would insulate cash rich councils from the impact of rising costs in other areas such as energy.

But Mr Wood said that only a minority of councils had big enough reserves to benefit substantially from the increased lending rates.

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