The stock of UK notes and coin in circulation was growing strongly before the Brexit referendum and the rate of increase has risen further since the vote. This may indicate resilience in retail spending. Alternatively, the public may be “hoarding” cash in expectation of negative interest rates and / or restrictions on the supply of £50 notes.
    
Annual growth in notes and coin reached a seven-year high of 7.4% in April / May, remaining strong at 7.0% in June (month averages). Weekly statistics on the note issue indicate a further pick-up since the Brexit vote. As of last Wednesday (13 July), the stock of notes was 8.9% higher than in the corresponding week in 2015 – see first chart.


The annual change in real notes and coin (i.e. deflated by consumer prices) has displayed a significant contemporaneous correlation with the annual change in retail sales volume since the late 1980s (at least) – second chart*. The relationship, however, broke down temporarily around the turn of the century and during the 2008-09 financial crisis as worries about the banking system caused the public to hoard cash**. The Brexit vote is unlikely to have prompted similar concerns. Strong notes growth, therefore, may indicate that retail spending has remained solid since the referendum.


Alternatively, people may be hoarding notes not for safety reasons but because the Bank of England is expected to cut interest rates significantly, possibly even imposing a negative rate on bank reserves, forcing banks to start charging for operating current accounts. The Monetary Policy Committee has signalled that policy will be eased in August and the Bank’s chief economist, Andrew Haldane, has advocated a “sledgehammer” approach. Mr Haldane mused approvingly about negative rates in a speech last year and may wish to use the Brexit vote as an excuse to launch such an experiment.

Hoarding may also reflect increased demand for £50 notes due to uncertainty about their future supply. According to the Bank’s 2016 Annual Report, the value of £50 notes in circulation rose by 11.6% in the year to end-February, while lower-denomination notes increased by only 5.1%. Governor Carney confirmed in June that there are no plans to introduce a plastic version of the £50 note, fuelling fears raised by Mr Haldane’s earlier speech that the Bank intends to restrict the future supply of cash in order to create scope for interest rates to fall further below zero.

*Correlation coefficient = 0.61 since 1989.
**The concerns in late 1999 reflected the possible impact of the Y2K changeover on banks’ computer systems.