Bitesize: The end of a paradox?

Ellen Caswell

People in the UK are using cash less and less to pay for goods and services. In 2017, debit cards overtook cash as the most popular payment method.

Over recent decades, this decline in the use of cash for transactions has occurred alongside a rise in the total value of notes in circulation. Between 2005 and 2017, the value of Bank of England notes in circulation doubled, growing faster than inflation, largely driven by the £20 and £50. This suggests increased use of banknotes as a store of value.

Yet this paradox of falling transactional use, but rising notes in circulation, may now be disappearing.

Peak-to-peak growth – which measures the difference between peak levels of notes in circulation (usually in the run up to Christmas) each year – was just 0.58% in 2018 and 0.77% in 2017. This compares to 10% in 2016, and above 5% in the decade preceding.

Are we at a turning point? The flat growth in recent years suggests that this may be the case, with banknote demand reflecting falling transactional use of cash for the first time.

Or we may simply be seeing a correction of the strong growth that we witnessed in 2016 – which was driven in part by the depreciation of sterling post EU referendum and the launch of the new £5 polymer banknote.

Being aware of a possible turning point is important in judging how much we can rely on the past to predict the future when forecasting banknote demand. It also emphasises the need to continue research on the current and future drivers of cash demand.

Ellen Caswell works in the Bank’s Notes Directorate.

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