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ITEM EX11 - ANNEX 1

EXECUTIVE – 6 JULY 2004

TREASURY MANAGEMENT OUTTURN 2003/04

Market Background 2003/04

Interest rates

The year began with mounting concern that it was likely to be dominated by fears of deepening recession in America and Europe and to a lesser degree in the UK. The MPC had surprised the financial markets in February by cutting base rate to 3.75%. Shorter- term PWLB rates remained under downward pressure throughout the first quarter of 2003/04 and longer-term rates fell to new lows. The 25-30 year rate fell to 4.4% in mid June.

Market sentiment changed in the second quarter, initially triggered by unexpected monetary policy signals from the US. Bond markets fell sharply and PWLB rates returned to a rising trend. By the end of July, US economic activity had turned around and showed an annualised growth in excess of 8%. During June US and Euro zone rates were cut to 1% and 2% respectively. The Monetary Policy Committee followed suit cutting UK interest rates by 25bps to 3.5% on 10 July 2003.

The July base rate cut (viewed with hindsight as a ("cut too far") was reversed in November with a move back to 3.75%. This was the first UK base rate rise for four years and was widely regarded as a signal that the interest rate cycle had passed its turning point. The rise was intended to reduce the level of borrowing and slow down an excessively robust housing market.

Long-term PWLB rates rose during the autumn and the 25-30 year rate was pushed up to a range of 4.90 – 5.05% until late December, after which it eased back to 4.75% by the end of March.

During February 2004, there was an improvement in the outlook for growth with the MPC revising their GDP projection from 2.7% to 3.5%. The Housing Market showed no signs of slowing and strong consumer spending, increasing household debt and growing confidence levels, led the MPC to increase base rates by a further 25bps to 4%, on 5 February 2004.

The US labour market picked up significantly by the end of the financial year and US interest rates are expected to rise during 2004. The domestic and international scene makes further increases in UK base rates likely during 2004.

Gilts

2003/04 was a difficult year for gilts. The extreme negativity in bond markets in anticipation of UK and US interest rate rises led gilt yields to spike up sharply in July, August and again in October. These months were probably the worst for gilts in nearly a decade. The 5-year gilt yield rose from 3.52% in mid June to 5.01% at its peak on 3 November 2003. The 10-year gilt yield rose from its low point of 3.85% in June to 5.11% in November. Gilt prices fell correspondingly, eroding capital value.

Long-term gilts were much sought after for their ‘safe haven’ status in the run up to the Iraq war. This increased gilt prices and depressed yields, hence bringing the PWLB 25-30 year rate down to around 4.5%. When the war started in mid March gilts lost that status and long gilt yields rose sharply, pushing the 25-30 year PWLB rate back up to around 4.8% in April before falling back again in May on world fears over increasing deflationary risks. These fears rapidly evaporated during the next quarter. The strong rebound of growth towards the end of 2003 pushed long-term PWLB rates higher. However, with the pace of US growth weakened during 2004 the long-term PWLB rates were bought back down again, with the 20-25 year rates within the range 4.65% -4.90% during March.

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