Analysis: RBA Makes Record as Australians’ Love For Cash Grows

• Published on
• 15 Jan 2021, 08:40 AM

(This story was first published on January 13 and sent via email to paying subscribers)

By Sophia Rodrigues

In a year that saw usage of cash decline further, the value of banknotes on issue in Australia rose by the largest on record as Australians’ love for physical currency surged amid near-zero interest rates.

As a result, the Reserve Bank of Australia made a record among the major global central banks, posting the largest year-on-year increase in notes on issue. The RBA also holds another record – nearly one-third of its balance sheet is in the form of currency notes.

In 2020, the amount of bank notes on issue in Australia rose a record A$14.6 billion, up 17.3% y/y, and more than double the growth of A$6.6 billion seen in 2008.

In terms of percentage growth, the closest to RBA was the Federal Reserve which saw a 15.8% jump in notes on issue. In absolute terms it was US$284 billion.

Among the other central banks, it was 11% growth at the ECB, at Bank of Canada it was 15%, around 10% at the RBNZ and less than 10% at the Bank of England, Bank of Japan and Swiss National Bank.

The increase in 2020 pushed total notes on issue at the RBA to A$98.6 billion. The RBA’s balance sheet during the year almost doubled to A$322 billion from A$176 billion in 2019. This means nearly one-third of RBA’s total liabilities now comprises of notes of issue.

Again, the closest to RBA is the Fed which has nearly 27% of its total liabilities as currency in circulation. But in case of Fed, this is expected given the U.S. dollar’s status as a reserve currency which means there is global demand for the physical form of the currency.

FALL IN OPPORTUNITY COST

Australians’ love for banknotes is not a new development but anxiety related to COVID-19 and a further fall in opportunity cost of holding the physical currency meant they demanded more of it.

During the year, the RBA’s cash rate target dropped from 0.75% to a new record low of 0.1%.

On a per capita basis, Australians’ holding of banknotes is among the highest in the world, excluding the eurozone and the U.S. It is currently around A$4,000, up from A$3,300 a year earlier.

In a speech in 2018, RBA Governor Philip Lowe pointed out that the value of banknotes on issue, relative to the size of the economy, was close to the highest in fifty years.

Back then, for every Australian there was around 30 of A$50 and 14 of A$100 banknotes on issue. Currently, it is 38 of A$50 and 17 of A$100 for every Australian.

The main explanation is that some people, including non-residents, choose to hold a share of their wealth in Australian banknotes, Lowe said, adding, the opportunity cost of doing that was less than it used to be because of the low level of interest rates.

In 2020, demand was the strongest in the month of July when over A$3.5 billion of new notes were issued. But even by December, it remained relatively high with over A$1.6 billion of notes put into circulation.

Cash withdrawals via ATM though continued to fall during the year in line with the trend in recent years. In November 2020, total value of cash withdrawals in Australia was A$8.8 billion, down from a peak of A$14.0 billion in December 2008.

This means the increase in banknotes on issue can be explained by a drop in cash deposits, and increase in over-the-counter cash withdrawals, with the balance likely sitting in the banks’ own deposit vaults.

--Contact: Sophia@centralbankintel.com