this were to turn out to be the case, monetary policy would have the flexibility to respond provided the inflation outlook remained benign. conclusion to summarise, the challenge that we australians face is to make the best of the fundamental changes that are taking place in the global economy. as a country rich in natural resources, bis central bankers ’ speeches we are well placed to benefit from this change. but if we are to take advantage of this opportunity, the structure of the economy must continue to evolve. labour and capital will continue to shift to the resources sector. industries affected by the high exchange rate will need to find ways of moving up the valued - added chain. and parts of the service sector will need to continue their adjustment to the changes in household spending and borrowing. these adjustments are difficult, but if they are not allowed to occur, as a nation we will have given up the potential benefits that the changes in the world economy are making possible. public policy can help in the adjustment process by promoting flexibility in the economy and by reducing some of the costs of change for individuals and communities. it can also help manage some of the new risks arising from these global developments. monetary policy can help the adjustment by keeping inflation under control and maintaining stability in the overall economy. our judgement is that the current setting of monetary policy is consistent with this, with the board keeping the cash rate unchanged at 4. 25 per cent at its meeting yesterday. i would like to thank you very much for your time this morning, and i am happy to answer questions. bis central bankers ’ speeches

fixed exchange rate system, of course, is that it provides a nominal anchor, as long as the monetary policy of the country to which the exchange rate is fixed is itself conducted in a way that is consistent with reasonable price stability. this was indeed the case for most of the period up to around 1970. under the bretton woods or gold exchange standard, most currencies were pegged to the us dollar, whose value was in turn tied to gold. the central role of the us dollar in the system placed a strong discipline on the macro - economic policies of other countries. unless countries were prepared to make significant unilateral exchange rate adjustments, which happened only rarely, their inflation performances in the longer run were effectively determined by us monetary policy. private consumption deflator four - quarter - ended percentage change % % opec i ( oct - 73 ) australia united states - 5 - 5 as i have argued elsewhere, this system worked reasonably well until the second half of the 1960s. the united states for the most part conducted conservative monetary and fiscal policies that kept budgets close to balance and inflation low, and this underpinned a period of sustained low inflation in other countries. in australia, apart from some periods influenced by sharp commodity price movements, inflation was generally low and close to us rates. this situation began to change from around the mid 1960s. tax cuts in the 1964 and 1965 budgets, and subsequent increases in defence spending associated with the vietnam war, shifted us fiscal policy to an expansionary position. inflation began to increase, albeit from very low levels, after about 1965, and balance of payments deficits run by the united states meant that a number of other countries began accumulating substantial dollar reserves. this fed the process of money creation in these countries and relaxed the constraints on their domestic macro - economic policies, with the result in many cases that inflation rates increased. causes of the eventual breakdown of the bretton woods system in the face of these pressures have been much debated, but the core of most explanations is that the system lost its capacity to provide effective policy discipline. this, in turn, reflected the loss of suitability of the us dollar as the system ’ s nominal anchor, the role it had played so effectively over the two previous decades. it is interesting to note that the policy debate in australia in the 1950s and 1960s paid little or no explicit attention to the nominal anchoring role of the monetary regime. that is not because the problem of inflation was thought to be un