Pierre Duguay: The Bank of Canada's perspective on the penny
Remarks by Mr Pierre Duguay, Deputy Governor of the Bank of Canada, to the Senate
Committee on National Finance, Ottawa, Ontario, 26 May 2010.
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Good evening Mr. Chairman, honourable Senators.
I'm pleased to have the opportunity to appear before you tonight to provide the Bank of
Canada's perspective on the penny. First, let me take a moment to explain the Bank's role
regarding Canada's currency. We are responsible for supplying Canadians with bank notes
that they can use with confidence. At year-end 2009, there were 1.8 billion bank notes in
circulation, with a total value of $55.5 billion - approximately $1,630 per Canadian. The Bank
of Canada is not responsible for coins. Decisions on coinage rest with the federal
government, in particular, the Department of Finance, and with the Royal Canadian Mint.
However, coins are an essential adjunct of bank notes to complete cash transactions. So, the
Bank does have an interest in coins, and we welcome your review of the case for keeping or
eliminating the penny.
I would like to remind you that cash remains very important to Canadians, despite the
popularity of alternative payment options. Surveys by the Bank of Canada have found that
almost three-quarters of Canadians pay with cash at least once a week, compared with
64 per cent for debit cards and 36 per cent for credit cards.1 These surveys show that cash is
the preferred method of payment for purchases under $25. (Debit cards are preferred for
purchases in the $25 to $100 range, and credit cards are preferred for purchases greater
than $100.)
The Bank's interest in coins can also be viewed in the context of our responsibility for
monetary policy, which is anchored in our commitment to achieve our 2 per cent target for
inflation. Experience has shown that the best way for monetary policy to contribute to
economic performance is by keeping inflation low, stable, and predictable. Therefore, the
Bank views the possible elimination of the penny in terms of the potential impact on inflation,
and has conducted some preliminary research on this issue. The findings, which have been
made available to other researchers, show that any impact on inflation would be insignificant
and more likely non-existent.
A common concern is that retailers, who often post prices ending in 9 cents, may round
prices up to an even number, absent the penny, and that this would be inflationary. This
concern is unwarranted for a number of reasons. First, even if the elimination of the penny
did result in a rounding up of prices to the nearest multiple of 5 cents, which is unlikely, that
would be a one-time price increase and not a change in trend inflation.
Second, this one-time price increase of one or two cents would be so small, relative to the
prices of the items that make up the basket of goods and services priced by the total
consumer price index (CPI) that it would not register on that index since the CPI is rounded
to the nearest 0.1 per cent.
Third, it is very unlikely that prices would be rounded up, since such rounding would not carry
through to the cash register after sales taxes are applied, and retailers would lose the
perceived marketing benefit of posting a price that ends in 9 cents. In the absence of a
penny, rounding would only need come into play in cash transactions and would apply to the
total bill after tax, and not to each individual item purchased. If applied symmetrically,
rounding down of cash purchases ending in 1,2, 6, and 7 cents would offset the rounding up
of those ending in 3,4 8, and 9 cents.
In New Zealand, for example, the choice of rounding up or down on cash transactions was
left to retailers after the country eliminated its one- and two-cent coins in 1989. Many larger
retailers opted to round down; a few small retailers opted to round up. Ultimately, there was
no noticeable effect on inflation in New Zealand.
Indeed, that has been the international experience that we have seen. In both Australia and
New Zealand, the elimination of small coins (one-cent and two-cent coins) has had no
noticeable effect on inflation.
Inflation, however, does have an influence on the value of the penny. Since the coin was first
produced by the Royal Canadian Mint in 1908, the penny has lost 95 per cent of its
purchasing power. In other words, the penny then had the same purchasing power as
20 cents would today. Indeed, in 1908, you could buy your daily newspaper for two cents,
and a loaf of bread cost five cents.
On that, I thank you for your invitation to appear here tonight, and welcome the opportunity to
answer your questions related to the future of the penny.