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Measures to stem inflation

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THE I TOE, E„ 0. V/HTfLAK. Q.C. . M.P


Inflation is the major economic problem facing us

today. . It is robbing people by reducing the purchasing

power of their savings„ It is altering the distribution of

income in an arbitrary and often vicious way·. It is

distorting resource allocation and encouraging a rush into

supposedly inflat.ion-proof real assets such as land or

housing. It is anathema to all of us - and rightly so.

no panacea; no simple solution achievable through one line

of policy, But the fact that there is no simple solution

to inflation dees not mean that we can just throw up our

hands in the face of it. On the contrary, we have to

tackle it head on. '

of monetary policy. The money supply increased in 1972-73

by 26 per cent. Most of that increase is traceable to

developments in calendar year 1972. Actions we have taken

since the.election have considerably slowed the rate at

which money is being injected into the economy. But

present prospects are for a further over-large increase in

the money supply in 1973-74. Such an outcome would be

entirely inappropriate if we are to stand any chance of

reining in the rate of increase of prices. We are

determined that .it must not occur.

Inflation must be fought on all fronts. There is

One obvious area of concern is the broad field

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Two initiatives are therefore being taken which

together will have the effect of producing a sharp cut in .

liquidity. . · i . .

First, in the market for Government securities,

the Reserve Bank will, with the concurrence of the

Government, press its open market operations vigorously

with, the aim of significantly increasing sales of Government

securities, This will both mop up funds in the hands of ·

the private sector and reduce the liquidity of private

sector holdings of financial assets.· In the process, a ·

sharp rise can be expected in interest yields on existing

issues of Australian Government and, in due -

course, in rates to be offered on new issues. Substantial.,

increases in other interest rates will follow as effects

of the operations spread, through other markets for funds.

Increasing interest rates is not something to be

undertaken lightly. But curbing the increase in liquidity ·

and the money supply is an essential pre-condition if

inflation is to be countered at all. M e do not seek

higher interest rates for their own sake. They are needed

in order to make the purchasing and holding of government

securities more attractive, which they must be if they are

to compete effectively with alternative forms of

investment. If, as a consequence, the higher interest

rates have the effect of curbing the speculative rush into

land and property, that will be all' to the good. ■

The effects of this measure will be chiefly felt

within the domestic economy. We have, however, also paid

close regard to the state of our external accounts. There

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is a particular reason for doing so in this context: our

prospective continuing external surplus (on both current

and. capital accounts) is itself a primary1 source of the

strong growth of the money supply which ip i n ■prospect . ! '

over the year ahead,. ‘

Measures were„ of course, taken late in 1372 and

in February 1973 to restrict capital inflow and reduce the

external 'surplus. The tariff cut of last July will also

have in due course a further significant effect in that

direction. None the less, in 1973-74 reserves again seem

likely to increase strongly from a level which still remains

excessive. .

After close and careful .examination of the present

situation and prospects in these regards it has been

decided to appreciate the exchange value of the Australian

dollar, · ■

The exchange rate change will establish a now

formal parity of 28.3848 Australian dollars per fine ounce

of gold.. This represents an appreciation of 5 per cent

from the former parity. On this basis the rate for the

11,8, dollar will become $A1 = $US 1.4875 in,stead of the

former $TJS 1.41.67.

This further appreciation in the exchange rate

will help to reduce the growth in reserves and. thereby

moderate the growth in the money supply emanating from

that source. It will also help to keep down the prices of

imports, Figures published by the Statistician on

5 September indicated that, following the revaluation of

Australian dollar last December, import prices fell by


b r . i ' · ' cent between the jlecembcr oner tor of 1972 and the

June quo:.*ter of 1 9 7 3. The appreciation v/jJl also serve to

dampen somewhat the effects in domestic ror.rkois of high

prices on v/crii markets for exportable goods.

Ac on the occasion of the December 1977

revaluation, the Government c bends ready to examine

sympntheticully the position of any industries which arc

seriously affected by, and find it partieularly difficult

to bear, the consequences of today1s appreciation, it

v,*j .1,1 take such action as may be necessary, in such cases,

to cose the processes of adjustment to new conditions,

The International Monetary fund has been notified

of our on the exchange rate and we are anticipating

its concurrence. The GoA'crnor of the Reserve Bank, will be

making a separate statement giving further details,,

Canberra, A . Ο.Ϊ.

S September 1979,