Risk of getting rid of 1p and 2p coins 'unfounded', say Bank of England economists

  • img Harvey Cawdron
  • POSTED ON 22 Aug 2018

Claims

Bank of England economists have reopened the debate over the future of 1p and 2p coins by suggesting that their withdrawal from circulation would not result in inflation. 

In a blog post on Wednesday the analysts claimed their work and the 'overwhelming' evidence indicated that the removal of coppers would have 'no significant impact on prices'. 

Marilena Angeli and Jack Meaning, the authors, rebuked the argument that cutting these coins would lead to inflation as retailers would round up prices. 

They said that 'Price rounding would be applied at the total bill level, not on individual items and it would only affect cash transactions, which make up a low proportion of spending by value. Even if individual prices were rounded on all payments, analysis of UK price data suggests no economically significant impact on inflation.'

They pointed to the sharp decline in the use of the coins as consumers increasingly move towards contactless transactions instead of cash payments. This was shown in the Royal Mint's production of 1p and 2p coins, which practically halved in 2016-17 when compared with the previous year. Their production fell from around 500m to 288m. 

There have been previous instances where the future of 1p and 2p coins has been debated. In March, at the time of the chancellor's spring statement, the treasury began a review of cash and digital payments, and concluded that it made no economic sense to make coins that were not used often. 

The Treasury said that roughly 60% of copper coins were only used in 1 transaction before being stored in a jar or thrown away. 

But, the day after the review was announced, Downing Street said it had no intention of getting rid of 1p and 2p coins after a short but determined media campaign and concerns raised by charities.

Last year, the Guardian revealed that George Osborne nearly abolished 1p and 2p coins during his spell as chancellor, but David Cameron, the then Prime Minister, blocked the move due to fears of public disapproval 

On Wednesday, revisiting the debate, Bank of England economists called into question the cost effectiveness of the continued production of the coins. 

They argued that 'As inflation slowly erodes the purchasing power of the penny, the balance between its usefulness and its cost begins to shift'. 

Angeli and Meaning said that history suggested that scrapping low denomination coins did not cause inflation, providing the example of the axing of the halfpenny in 1984. 

They wrote that 'Many of the arguments that were made in the early 1980s around the inflationary impact of removing that particular tiny coin are being made now. However, the evidence, including our own work on UK price data suggests they are unfounded'.