Media Release Statement by the Governor, Mr Ian Macfarlane: Australian Office of Financial Management Cross Currency Interest Rate Swaps

It was brought to the attention of the Reserve Bank in mid 2000 that the Australian Office of Financial Management (AOFM) was planning to make early repayments of US dollar borrowings in order to keep its US dollar debt exposure at its trading benchmark of 15 per cent.

This would have involved sales of Australian dollars and purchases of US dollars at a time when the foreign exchange market was very unsettled. The Australian dollar had fallen by 15 per cent during the year to date and was setting all-time lows nearly every month. Sales of Australian dollars (either directly into the market or via the Reserve Bank) would probably have speeded up the rate at which the currency was falling.

On 5 October, I wrote to the Secretary to the Treasury, advising against the mechanical application of the 15 per cent benchmark. I later spoke to the Treasurer and sent him a letter on 1 December. On 6 December, I met with the Treasurer and the Secretary of the Treasury to discuss the matter. At our December meeting I made the following points:

  • while the benchmark was binding on the AOFM, it was always the prerogative of Treasury to change it whenever they thought it was having harmful effects;
  • it was always intended that macroeconomic policy considerations could override considerations of profits or losses. The need to avoid exacerbating the already large fall in the exchange rate was such a macroeconomic consideration;
  • it was doubtful, even on purely commercial grounds, whether terminating swaps early and realising losses over the following months when the Australian dollar was at historical lows would make sense in the long term.

The benchmark was suspended accordingly, and a review of the strategy for cross currency swaps was undertaken.

The Reserve Bank believed at the time, and still does, that our advice to override the 15 per cent trading benchmark and adopt a more gradual resolution, as market conditions permitted, was correct. Macroeconomic policy considerations will always be more important than portfolio allocation rules. In any event, now that the foreign exchange market has settled, it is clear that the December 2000 decision to override the benchmark did not materially affect the size of the accumulated losses.


Mr R. Battellino
Assistant Governor (Financial Markets)
(02) 9551 8210

Dr R. Rankin
Head of International Department
(02) 9551 8410