Australian central banker admits disinformation campaign to dupe FX markets


Markets 'Duped' in Dollar Crisis

By Tim Colebatch
The Age, Melbourne (Australia)
Monday, September 11, 2006

Reserve Bank governor Ian Macfarlane has revealed that the Reserve teamed up with Prime Minister John Howard and Treasurer Peter Costello in the 1997-98 Asian financial crisis to hoodwink foreign exchange markets into thinking interest rates might rise.

In an hour interview last night with ABC radio, Mr Macfarlane said the "unusual" collaboration was intended to prevent interest rates rising, in response to a worrying plunge in the value of the Australian dollar.

In the panic of the Asian financial meltdown, foreign exchange markets spread "contagion" to most Asian currencies, dragging down the Australian dollar from 73.91 US cents on October 13 to 58.45 US cents eight months later. At one point the dollar fell by more than 5 US cents in a fortnight. It then had several more sustained falls before turning back up.

Mr. Macfarlane said in most other countries whose currencies were falling, central banks had raised interest rates to try to shore up the currency. But the Reserve, which had cut cash interest rates from 7.5 percent to 5 percent over the previous 15 months, thought this would be ineffective and decided to try another strategy: "to make sure that a lot of people thought interest rates might go up".

"It was very important to get the rhetoric right," he said. "Canberra was very helpful. We sat down and talked to the treasurer and the prime minister, and we all agreed on various things that should be said, and should not be said.

"We agreed -- and it's an agreement which by and large has held very effectively since then -- that the treasurer and the prime minister do not talk about the value of the Australian dollar."

They could, however, always hint that rates could rise.

Mr. Macfarlane, who steps down as governor on Sunday, will present the ABC's annual Boyer Lectures later this year.

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