Lately, there´s been some talking about Trichet interventions in the FOREX market. He says he has just done "sterilized interventions". What is it?
When a Central Bank tries to influence its exchange rate, we call it intervention. When a CB bank sterilizes its interventions, it offsets its action through its monetary policy practices (open market operations or interest rate targets adjustments). Selling a currency can be sterilized when the central bank sells money market instruments (short term securities) to drain back the excess funds in circulation as a result of the intervention. An unsterilized policy allows for the foreign-exchange markets to function without manipulation of the supply of the domestic currency; therefore, the monetary base is allowed to change.
15/5/2010
