Financial Times

Time to scrap the cash and go digital, says Bank of England chief economist

by Chris Giles

September 21, 2015 | 12:45 am
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The Bank of England has already cast aside paper notes in favour of plastic but its chief economist has now proposed getting rid of cash altogether.

For many, the idea of abandoning a system that has been with us for centuries in favour of a government­backed digital currency will seem a step too far. But Andy Haldane, the
radical thinker at the BoE, argues that such a move would give the bank new flexibility in the event of another downturn.

In a speech to the Northern Ireland Chamber of Commerce he said it would help the bank manage inflation by enabling it to bypass the current constraint against lowering rates below
zero.

The assumption is if a central bank introduced negative interest rates ­ a radical move that would in effect amount to a charge on holding money ­ people would convert deposits into
cash. But abolishing cash would remove that option.

The speech reflects policymakers’ nervousness that they lack reliable tools to boost spending. Other economists have also argued that cash restricts central banks’ ability to stimulate
a depressed economy.

The Swiss and Swedish central banks have succeeded in setting negative interest rates, but most policymakers still believe in an “effective” lower band not far below zero. Some
central bankers argue that if you remove the lower band they would be better equipped to confront a slowdown.

Mr Haldane said he felt the world was slipping into a “third phase” of the economic crisis that started in 2008 and there could be a need to lower interest rates from their current historic
low of 0.5 per cent “to support UK growth and return inflation to target”.

Even though the BoE’s chief cashier insists notes and coins are here to stay, its chief economist said: “Perhaps central bank money is ripe for its own great technological leap forward,
prompted by the pressing demands of the zero lower bound [on interest rates].”

Mr Haldane noted that even if the BoE set a negative interest rate, consumers could bypass the charge without spending more by simply hoarding cash. He said that even though
interest rates in the US and UK might rise in the near future, “it is much more likely than not interest rates may need to return to ground zero at some point in the future”.

Andrew Sentance, a former MPC member at the BoE, cast doubt on the thesis and called for more debate.

 

By Chris Giles ­ Economics Editor


by Chris Giles

September 21, 2015 | 12:45 am
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