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Tuesday, 7 December 1976

Mr LYNCH - As for the details of the change itself, I should have thought that they would be understood by the honourable gentleman, if he has regard for what was said last Sunday evening. However, I will seek to explain it to him and I will take a little time, having regard for the nature of the question. Hitherto, management of the exchange rate has been directed to maintaining for lengthy periods a fixed relationship between the Australian dollar and the trade weighted basket of currencies. Under this regime the rate for the dollar tended to vary from day to day against individual currencies, including the United States dollar but it took no account of developments in our balance of payments, nor in the domestic economy nor, specifically, of economic factors. Under the new pattern of management of the exchange rate, a trade weighted average rate will continue to be computed daily on the same basis as previously. However, the exchange rate will no longer necessarily be pegged, on a fixed relationship to the basket of currencies. Instead, as the Government has made clear, it will be kept under review and varied, as appropriate, in the overall context of management of the economy with emphasis upon economic factors.

This new pattern of management of the exchange rate will enable more frequent, more timely and smaller adjustments to be made to the rate. It is appropriate to the changing nature of the world economy and to Australia's international trade relationships. It is designed to avoid a build-up in expectations of major changes at longer intervals in the rate. It will permit the use of the exchange rate, as appropriate, as a more flexible arm of policy and, of course, will require little or no institutional changes. It is a further step in the development of the Australian foreign exchange system. A close watch will, of course, be maintained on the manner in which affairs develop from this point. I should say in explanation to the House that the management committee, which consists of the Governor of the Reserve Bank, the Secretary to the Treasury and the permanent head of the Department of Prime Minister and Cabinet met in Sydney on this matter on Monday morning. The Governor of the Reserve Bank reported to me the recommendation of that committee yesterday afternoon and the recommendation put by the committee was adopted by the Government. This led to the statement this morning of the Governor of the Reserve Bank.

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