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Making a mint

23 October 2015 By Swaha Pattanaik

Ireland is onto something. The Emerald Isle wants shoppers to use fewer low value coins, which can cost more to mint than they are worth. The side effect may be some inflationary psychology – just what central bankers around the world are trying to drum up.

From Oct. 28, consumers who pay cash in Ireland will see bills rounded to the nearest five euro cents. People can still ask for exact change if they want, and one and two cent coins will remain legal tender. But the aim is to mint fewer of these coins, which all too often end up languishing in jars or down the back of sofas.

Ireland has had its fill after issuing enough one and two cent coins to make a tower that would stretch 4,000 kilometres into outer space. The former cost 1.65 cents each to mint and the latter 1.94 cents. Packaging, transportation, storage, and other distribution and recirculation costs to banks and retailers have to be added on top.

Granted, Ireland isn’t a trailblazer. Belgium, Denmark, Finland, Hungary, the Netherlands and Sweden already have some sort of rounding policy and Canada announced plans to phase out its penny back in 2012. But the timing is ideal given the paucity of price pressures.

Whenever there is talk of rounding, consumers tend to have a sneaking suspicion that shops might nudge up prices to ensure figures are rounded higher rather than lower. This was certainly the view in the Irish town of Wexford, where the new policy was road-tested.

Six out of 10 adults in the town expected the policy to have an inflationary impact before the trial. Afterwards, this proportion only fell to about one in three even though mystery shopping tests found no evidence of rounding-related price rises. This has echoes of the 2002 changeover to euro notes and coins, when consumers’ inflation perceptions diverged markedly from what official inflation data showed.

The timing could be helpful. Central banks in the euro zone and elsewhere are desperate to conjure up inflation, and traditional monetary tools aren’t working. Encouraging a slightly more inflationary mindset is a helpful start. Penny-purging might just catch on.

 

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