If we are spending less cash, why are we printing more banknotes?

There is significant overseas demand, particularly for £50 notes - Chris Radburn /PA Wire

The amount of cash in circulation soared last year despite the rise of card payments - but what is it all being used for?

In the run up to Christmas 2016, the value of the Bank of England notes in circulation reached over £70bn for the first time - an increase of 10pc on a year earlier.

But at the same time, the number of transactions made using cash is falling - also by about 10pc per year.

So how are these two trends reconciled?

The Bank of England puts cash into circulation in response to demand. So when banks and individuals draw more cash and deposit less, banks report their growing need for banknotes. 

But deciphering exactly where that demand is coming from, and where all that cash is sitting, is difficult.

In a speech last week Victoria Cleland, chief cashier and director of notes at the Bank of England, pointed to a number of potential answers.

These included “significant” overseas demand for UK banknotes; people and businesses hoarding cash “outside of financial institutions” and “some cash used in the shadow economy”.

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She added that cash remains highly valued by many UK consumers, and is still relied upon almost entirely by 5pc of adults.

“It is often quicker than alternatives, it's universally accepted, offers certainty that the transaction has taken place,” said Ms Cleland.

Demand from overseas and from those hoarding cash in the UK has a major influence on the amount of notes in circulation. 

Bank of England research from 2015 found that half of UK banknotes in circulation were held overseas or used in the shadow economy, with only 21pc to 27pc actually used for spending at any one time.  The remaining amount was used for "domestic hoarding".

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Jeremy Light, of Accenture Payment Services, suggested other reasons why banknote demand could be increasing.

“Firstly, low interest rates mean people aren’t incentivised to keep money in a savings account - people are more likely to hoard cash instead of making the effort to bank it," he said.

Another reason he suggests is the influence of the "black economy", whose size and effects are difficult to gauge. But he added that there is "no suggestion this is growing significantly". 

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