- The Reserve Bank of Australia has revealed a “paradoxical” surge in demand for cash during the coronavirus pandemic.
- While many Australians move to card transactions, the RBA has had to increase the cash in circulation from $83 billion to $94 billion due to increased demand for bank notes.
- “Some people seem to be wanting to keep some extra money at home,” RBA Governor Philip Lowe told a parliamentary committee on Friday as he foreshadowed the economic challenges facing the country.
- Visit Business Insider Australia’s homepage for more stories.
The central bank has seen a sharp uptick in Australians stocking up on banknotes in recent months on the back of growing financial concerns.
Fronting a parliamentary committee on Friday, the Reserve Bank of Australia Governor Philip Lowe acknowledged that there was an undercurrent of anxiety in the community.
“While COVID-19 has accelerated the shift to electronic payments, there has, paradoxically, also been record demand for banknotes,” he said in his opening statement.
“Some people seem to be wanting to keep some extra money at home. The result has been that the stock of banknotes on issue has increased from $83 billion in February to $94 billion today.”
The $11 billion surge is even more significant when considering that the average consumer is shirking cash. Spending data shows an increasing dependence on card transactions, with cash withdrawals halving at the start of the pandemic.
Still, a small group have simultaneously taken out disproportionate amounts of cash; “into the millions” by the RBA’s reckoning. They have perhaps been startled by the prospect of recession, negative interest rates – which the RBA says are “extraordinarily unlikely” – and to a smaller extent, a ban on cash transactions over $10,000.
The central bank, however, says it has dealt with the rise in withdrawals.
“We have met this extra demand despite our main storage vault being located in one of the coronavirus hotspots in Melbourne,” Lowe said.
It comes as the economy faces its first recession since the early 1990s.
“We do not yet have the GDP data for the June quarter, but it will show the biggest economic contraction in many decades, likely to be around 7%,” he said. “If there is any good news to be found here, it is that this decline is not as large as initially feared.”
With the number of unemployed Australians hitting one million in July and rising, Lowe noted the fact it has “not been as bad as expected”.
“Hours worked were initially expected to fall by a staggering 20% over the first half of this year. The actual fall has been around half of this, largely due to Australia’s initial success in containing the virus and the earlier-than-expected easing of some restrictions,” he said.
However, while that may be the case, he maintained that easing unemployment should remain Australia’s number one priority. After all, the RBA forecasts it will sit at 10% going into next year and remain above 7% in the years to follow.
While that’s well-above its pre-pandemic 5.2%, it may also be wildly optimistic, according to IFM Investors chief economist Alex Joiner.
“The RBA [is] forecasting the biggest and longest recession in Australia’s modern history with the best recovery in the labour market, largely off JobKeeper working not only to provide income but also rapid re-employment,” he said in a tweet.
Whether those forecasts com to fruition remain to be seen, but the RBA has ruled out the idea that it will get there via modern monetary theory (MMT).
“One monetary policy option that has been the subject of public discussion over recent months is the possibility of the RBA creating money to directly finance government spending. For some, this offers the possibility of a ‘free lunch’,” Lowe said.
“The reality, though, is that there is no free lunch. There is no magic pudding. There is no way of putting aside the government’s budget constraint permanently.”
With the RBA largely out of new ideas, Lowe expects the federal government will need to continue to offer support to see the country throw the storm.
Some Australians, however, are evidently not convinced.
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