The paradoxical development of the two motives to use cash – the decline in its usage in payments accompanied by the growth in its holdings – has been evident for a number of years, but the Covid-19 pandemic has accelerated this trend. Several payment studies confirmed the increase in online shopping and the growing use of contactless and mobile payments media in 2020, resulting in a significant decrease in the use of cash in transactions. At the same time, precautionary demand for cash grew, as is typical in times of uncertainty. In 2020, the use of cash as a store of value reached record growth rates, even exceeding those of the 2008 financial crisis.
When the pandemic eased its grip towards the end of 2021, a kind of return to a new normal was visible in cash demand. However, the events since then have shown this to be only temporary. Not only have the lockdowns during the pandemic disrupted global supply chains, but the shocking Russian invasion to Ukraine has created further uncertainty. Even if the war has hit hardest on the Ukrainian people and infrastructure, its impacts have been felt across the world, besides creating a strong reaction, it has brought about a galloping inflation of food and energy prices.
The presentation will focus first on the development of banknote circulation in value terms in 2021, and address particularly what did happen to the higher-than-normal cash balances accumulated during 2020. Secondly, addressing the development also in volume terms will shed further light on the store of value function of cash. Thirdly, the impacts on cash demand caused by the growing inflation and the geopolitical tensions created by the Russian attack will be assessed by considering the annual growth rates of the banknote demand in June 2022.
The two developments of cash usage going in opposite directions have raised questions within the central bank community on how to ensure the resilience of the cash infrastructure, and the access to and acceptance of cash. A functioning cash infrastructure in normal times is also a prerequisite for its operational capability in a crisis. The developments have also intensified discussion about central bank digital currency (CBDC) as a complementary form of public money. According to the most recent survey of BIS, nine out of 10 central banks in the survey are exploring CBDCs, and more than half are now developing them or running concrete experiments. Against this background the presentation will in conclusion elaborate why the avoidance of deterioration of the cash infrastructure is as important as the development of the CBDC from the point of view of the issuance of public money.