Getting rid of $100 notes may be ineffective in disrupting crime, because $50 notes are more commonly used in illegal cash transactions, the Reserve Bank says in a paper.
After an inquiry this week kicked off into the cash economy, including the future of the $100 note, RBA researchers on Thursday said there could be legitimate reasons for the strong lift in demand for cash in recent years.
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Future uncertain for $100 note
The government's black economy taskforce will consider the future of the $100 bill as it looks to crack down on cash payments to rake in unpaid tax.
Some countries overseas, most recently India, are phasing out high-denomination bank notes as part of a crackdown on tax evasion, leading to speculation Australia might do the same, as consumers here embrace digital payments.
Against this backdrop, an article in the RBA's December-quarter Bulletin acknowledged that one potential source of demand for cash was illegal activity, and the desire to hide income from the tax man.
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It was impossible to say with any precision how much cash was being used in the underground economy, the paper said. However, key crime and money laundering agencies had told the RBA $50 bills were generally the note of choice for criminals.
"Liaison with AUSTRAC (Australian Transaction Reports and Analysis Centre) and the Australian Crime Commission suggests that it is the $50 denomination – rather than the $100 – that tends to be preferred by criminal elements because of its ubiquitous use in legitimate transactions," the paper said.
"This suggests that to the extent that the $100 banknote is being used for nefarious purposes, any phase-out may not be particularly disruptive to those engaged in such activities."
The number of $100 notes on issue has surged in recent years even though they are infrequently used in transactions. The number of $100 notes grew by 9 per cent last year, the fastest increase of any denomination, RBA figures show.
As cash is gradually displaced by electronic payments, overseas economists such as Kenneth Rogoff have called for high-value bank notes to be scrapped as a way to curb organised crime.
UBS analyst Jonathan Mott last month said removing large denomination bank notes would be "good for the economy and good for the banks".
Yet the RBA article argued the current mix of bank note denominations was serving the community well, pointing to legitimate reasons for the recent strong demand for cash.
The global financial crisis had triggered higher demand for cash from people as a precaution, it said. Very low interest rates on bank deposits also meant there was less of a cost in interest forgone in deciding to hold cash.
Foreign demand for Australian cash might have also increased in recent years, as falls in the Australian dollar tended to boost demand for bank notes from tourists and foreign students, it said.
As well, it said $100 notes were used in a "non-negligible" share of legitimate transactions.
Up to 5 per cent of the notes banked by retailers and supermarkets were $100 notes, it said, while at post offices it was 10 per cent, probably because of household bill payments.
It also said having $100 as the highest denomination note was similar to the most valuable bank note in other countries including New Zealand, Canada, Japan and the United Kingdom.
The RBA is the issuer of Australia's currency. It makes a share of its profits from creating money, because it in effect sells notes and coins to banks at their face value, even though the currency costs much less than that to produce.
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