COVID-19 stash: RBC notes high demand for currency as pandemic drives Canadian “dash for cash”

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      RBC Economics reports that fears associated with COVID-19 has driven Canadians to stock up on cash.

      “Demand for cash is at its highest level in 60 years, despite a broad shift to e-commerce and virtual payments during the pandemic,” the bank noted.

      RBC economist Josh Nye stated in a report that the pandemic didn’t kill cash.

      “In fact, Canadians’ attachment to hard currency only grew stronger,” Nye wrote in a May 9, 2022 report.

      Cash withdrawals “rose sharply early in the crisis, as notes in circulation increased by twice as much as would have been expected in 2020, and remained elevated through 2021”.

      A chart included in the report show that the percentage of banknotes in circulation as a share in the economy rose to 4.4 percent in 2021 compared to 2.9 percent in 1981.

      “Indeed, though the pandemic didn’t reverse the long-running decline in cash transactions, it didn’t accelerate it either,” Nye noted.

      However, Canadians aren't touching their stash.

      The economist noted that payment records show a “nearly straight-line drop in the volume of cash transactions, from 54% in 2009 to 22% in 2020”.

      “Credit cards picked up much of that decline, particularly for e-commerce transactions and tap-and-go payments,” Nye wrote.

      So if people weren’t using their extra cash at the store, what are they doing with it?

      “Crises (or fears of crises) are often tied to a dash for cash,” Nye noted.

      He cited as examples the increase in demand for cash amid fears of the Y2K bug at the turn of the 21st century and the 2007-2008 global financial crisis.

      “On that basis, Canadians appear to be driven by a desire to stash, not spend cash,” Nye stated.

      Banknotes in $50 and $100 denominations “accounted for all of the increase in currency demand (as a share of GDP) since 2014”.

      “The $100 bill now accounts for 60% of currency in circulation, up from 50% in 2010,” Nye said.

      In addition, low interest rates are likewise “associated with higher demand for large denomination notes—which tend to play a store of value (savings) role”.

      The Bank of Canada so far has raised its interest-setting rate twice this year.

      The central bank is expected to further hike its rate through 2022 and into 2023.

      “Recent rising interest rates and multi decade-high inflation will likely take some but not all of the shine off cash as a savings vehicle,” Nye reported.

      Nye cited in his report a 2021 survey by the Bank of Canada, which indicated that 81 percent of respondents had “no plans to go cashless”.

      “And among 13% of respondents who said they were already cashless, half still had some cash on hand,” the RBC economist related.

      Nye’s report indicated that while cash is “no longer king in daily transactions”, hard currency has an “ongoing allure”.

      The reasons are straightforward.

      “As public money, cash is a direct claim on the central bank, with all the safety and security that brings,” Nye wrote.

      In addition, “It’s proven to be a reliable store of value (aside from inflation) and is almost universally accepted as a payment.”