The impending death of the €500 note has huge implications on the conduct and shape of future monetary policy. We believe the upcoming decision to stop printing the bill goes beyond anti-money laundering, which is commonly cited as the reason. Cash is the biggest enemy of negative interest rates and, in our view, the ECB’s latest action not only signifies further central bank dominance but also an increased likelihood of deeper negative interest rates in the future.
By impeding the number of €500 notes in circulation, the ECB trying to make sure that the cost of storing cash is more than keeping it in the bank – despite negative interest rates. Simply put, you need a much smaller space to safely keep larger denominated notes. Therefore, by ensuring that the largest note being printed is the €100 Euro note, it can be argued the ECB is attempting to regulate the amount of cash savers can hold.
At the extreme of this, a cashless society allows for unbounded limit on negative interest rates as zero yielding asset cease to exist. Incrementally this can be achieved by increasing storage costs, which banning of higher denomination notes clearly achieves.
Already, several ECB members, including Jens Weidmann, have weighed in on the debate by highlighting the impact on confidence such a move could entail. In the short-term, we believe deeper negative interest rates are unlikely as the focus turns away from using currency as a policy tool. However, the negative interest tool is likely to be an important one if / when the global business cycle turns requiring another dose of policy support and the absence of the €500 note could prove to be quite handy from a policy maker perspective.
Ultimately, we believe the removal of the note sends a clear signal that negative interest rates are going to go much lower. Finally, for the general public, this could further increase state and central bank dominance as nominal monetary variables now appear to be an outright tax on savers, which implies further re-distribution of wealth in order to achieve top-level macro-economic goals.
