Since the onset of the COVID-19 pandemic, the value of banknotes in circulation has risen sharply. This was despite cash being used much less for everyday transactions. Much of the strong demand for banknotes can be attributed to people's desire to hold cash for precautionary or store-of-wealth purposes. This behaviour is common during periods of significant economic uncertainty and stress, and many other countries saw similar patterns of cash demand.
Trends in banknote demand
The COVID-19 pandemic significantly affected cash demand in Australia. Demand for banknotes was extraordinarily high over 2020, despite a sharp decline in the use of cash in day-to-day transactions. The pandemic has accelerated trends in banknote demand that had already been occurring for many years. Namely, the use of physical currency as a means of payment has continued to decline, while demand for cash as a store of wealth has grown (Caddy, Delaney and Fisher 2020; Finlay, Staib and Wakefield 2019). This article explores how banknote issuance evolved during the pandemic so far, what factors drove the increase in demand for cash and how this compares to historical and international experiences.
The sharp rise in the demand for currency began in mid March 2020, around the time that the federal and state governments began imposing containment measures – such as travel restrictions and social distancing rules. The value of banknotes in circulation grew by 17.1 per cent over the year to February 2021 reaching $97.3 billion (Graph 1). This compares with average annual growth in banknotes outstanding of around 5 per cent over the previous decade. As a result, the value of banknotes in circulation, measured as a percentage of GDP, has reached a historic high of 4.9 per cent.
The bulk of the increase in banknotes issued by the Reserve Bank of Australia (RBA) occurred over the first 6 months of the pandemic ($13.1 billion in gross issuance from March to August). The large spike in demand in mid March coincided with a period of acute uncertainty during the early stage of the pandemic. Cash demand grew at a more moderate pace in April as strict pandemic containment measures limited economic activity. Demand for cash picked up again between May and August as government restrictions were gradually eased, giving households more opportunities to use cash. Since then, the value of banknotes in circulation has continued to grow at around its average pace.
The strong growth in banknotes in circulation was driven by demand for the higher denominations ($50 and $100 banknotes) (Graph 2). Around 70 per cent of the volume of banknotes issued since mid March 2020 were $50 banknotes and almost 20 per cent were $100 banknotes. At the same time, returns of poor quality or old series banknotes to the RBA were lower than usual throughout 2020, but have picked up in early 2021. Further, banks stopped returning banknotes that were surplus to their requirements after the onset of the pandemic. This is likely due to the sharp drop in economic activity leading to a slowing in the movement of cash around the economy, as well as some precautionary holdings by banks. The increase in high-denomination banknotes in circulation, coupled with reduced transactional cash use, suggests an increased desire in the community to hold banknotes as a precaution or store of wealth.
Drivers of cash demand during COVID-19
Transactional demand for cash
The use of cash for day-to-day payments has been in trend decline. The share of total retail payments made in cash has fallen from 69 per cent in 2007 to 27 per cent in 2019 (Caddy, Delaney and Fisher 2020). For in-person transactions, the share of payments made with cash was a little higher before the onset of the pandemic, at 32 per cent in 2019 (Delaney, McClure and Finlay 2020). COVID-19 has accelerated this trend; the decline in transactional cash use was most apparent at the times when lockdown restrictions were acute (and there was less opportunity for in-person spending), but survey data suggest that the shift away from day-to-day cash use may become permanent for many consumers. There is a range of data sources that point to weak demand for cash for transactional purposes, including: subdued issuance of low-value banknotes ($5, $10 and $20); declines in cash lodgements at cash depots; lower ATM withdrawals; a sustained shift to online spending; and survey data on banknote use during the pandemic.
There has been little issuance of low-value banknotes during the pandemic (Graph 3). These denominations are typically used for in-person transactions and for merchants to provide change, so subdued demand for these banknotes reflects reduced use of cash for consumer spending. This is particularly the case for the $5 and $10 denominations. There was no issuance of these denominations in the first half of 2020 and subdued issuance over the remainder of the year.