Bank of England report says withdrawal of coppers would have no significant impact on prices

This article is more than 2 years old

This article is more than 2 years old

Bank of England economists have reignited the debate over the future of 1p and 2p coins, arguing their removal from circulation would not stoke inflation.

In a blog post on Wednesday the analysts said their work and the “overwhelming” evidence suggested the withdrawal of coppers would have “no significant impact on prices”.

The authors – Marilena Angeli and Jack Meaning – dismissed the argument that scrapping the coins would be inflationary as retailers moved to round up prices.

“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 coppers as as consumers increasingly shun cash in favour of contactless payments. This is reflected in the Royal Mint’s production of 1p and 2p coins, which roughly halved in 2016-17 compared with the previous year. Production of pennies fell from about 500m to 288m.

In addition, they noted the prevalence of item prices ending in .99 had fallen in recent years and now accounts for just over 12% of prices.

It is not the first time the future of the 1p and 2p coins has been questioned. At the time of the chancellor’s spring statement in March, the Treasury launched a review of cash and digital payments, and said it did not make economic sense to produce coins that were used infrequently.

The Treasury noted that about 60% of copper coins were typically used in just one transaction before being stashed in a jar or thrown away.

However, a day after the review was announced, Downing Street said it had no plans to axe 1p and 2p coins after a brief but determined media campaign and concerns raised by charities.

As the Guardian revealed last year, George Osborne came close to abolishing 1p and 2p coins when he was chancellor, but the idea was blocked by the prime minister, David Cameron, who thought the public might disapprove.

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Returning to the debate on Wednesday, the Bank of England economists called into question the cost-effectiveness of continuing to produce the coins.

“As inflation slowly erodes the purchasing power of the penny, the balance between its usefulness and its cost begins to shift,” they argued.

Angeli and Meaning said history suggested that scrapping low-denomination coins did not stoke inflation, citing the abolition of the halfpenny in 1984.

“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,” the authors wrote.