sterlized intervention

7/29/2019 Sterlized Intervention

1/19

Foreign Exchange Market

Intervention

Amie Colgan,

Mary Deely,Fergus Colleran,

Anna Nikolskaya


2/19

Exchange Rate Intervention

Buy or sell foreign currency/assets to affect theexchange rate

Purchases push down the home currency valueof the exchange rate

Sales push it up


3/19

Influencing the Exchange RatesIncreasing the exchange rate Decreasing the exchange rate

Buy domestic currency and sell

foreign assets money supply

production

inflation

domestic interest rates

demand for investment

Increases exchange rate

Sell domestic currency andpurchase foreign assets

money supply

production

domestic interest rates

demand for investment Decreases exchange rate


4/19

Why Intervene?

Stabilise Fluctuations International trade and investment decisions

Dependent on exchange rates

Reverse the growth in the countrys trade deficit

Rise when exchange rates rise High currency cheaper foreign goods and services

Increasing imports and reducing exports

Rising trade deficit Intervention needed


5/19

Types of Intervention

Sterilized Intervention has little or no effect onthe exchange rate

Unsterilized Intervention has a higher impact

on exchange rates


6/19

How does Sterilized

Intervention differ from

Unsterilized Intervention?


7/19

Unsterilized Intervention

Central Banks purchase/sell domestic currency tosell/purchase foreign assets which expands/contracts themonetary base.

These actions may decrease/increase the money supply whichin turn affects prices, inflation and in turn interest rates .

Passive approach of intervention by Central Banks.

Allows for foreign exchange markets to function withoutmanipulation of the supply of domestic currency.

Has a higher effect on interest rates and liquidity.


8/19

Unsterilized Intervention Unsterilized Intervention is used when a Central Bank wants

to change its monetary conditions

It has an overall greater effect on money supply interest ratesand foreign exchange rates.

It takes time to come into effect, not useful if Central Bankwants an immediate change in exchange rates.

Has long term effects on the exchange rates.

Not used as often because it conflicts with monetary policy.


9/19

Sterilized Intervention Buying or selling domestic currency in order to sell or

purchase foreign assets to slightly affect exchange rates.

This can expand or contract the monetary base.

Sterilising means offsetting this expansion/contraction byselling or purchasing government bonds in the domestic bondmarket to bring back the monetary base to its target level.

When Central Banks want to leave money supply and interestrates unaffected.

Maintains price stability


10/19

Sterilized Intervention Intervention in exchange rates without affecting its domestic liquidity.

Process limits the amount of domestic currency available for exchange.

Altering its debt composition without affecting its monetary base.

Sterilised Intervention has little effect on long-term exchange rates.

Almost immediate effect on demand and supply of foreign exchange.

Affects expectations about future exchange rates, particularly if openmarket operations are hidden.

Its effect on exchange rates is not as obvious an Unsterilized intervention.


11/19

Diagram of Sterilised Interventionwhere

AA and AA are the money supply

E is the exchange rate

Y is GDP F is the equilibrium rate

D is demand for money


12/19

Effects of Central Bank Action onExchange Rates May be intentional or not

Motivation:

(1) Resist short run trends in exchange rates

(2) Correct medium-term misalignments of

exchange rates away from fundamental values

Decline in the frequency of intervention


13/19

Federal Reserve

Quantitative Easing

Wed 18/3/09 Fed announced it is to buy $300billion in long term treasuries &

$750 billion in mortgage-backed securities

Create more liquidityprint money

Euro rose 3.2% to $1.342 after the statement


14/19

Euro/Dollar fx rate Wed 18/3/09

thurs19/3/09


15/19

Statement of G7 Finance Ministers and

Central Bank Governors:

Excess volatility and disorderly movements inexchange rates have adverse implications foreconomic and financial stability.

14th February


16/19

Swiss National Bank (SNB) 12th MarchAim: push down Swiss franc

SNB cut its 3-month LIBOR target rate by 25basis points (to historic low of 0.25%)

Sold francs for euros and dollars SNB said its planning to increase liquidity by

Engaging in repo operations Buying Swiss franc bonds issued by private sector

borrowers Purchasing foreign currency on the FX market


17/19

Swiss Franc

Swiss Francs to 1 US dollar Swiss Franc to 1 Euro


18/19

Bank of England 5th March

Quantitative easing: up to 150 billion up to 75 billion mostly in medium and long-term

gilts over next 3 months 50 billion private-sector assets

Cut repo interest rate by 50 basis points to 0.5%

has depreciated against both and $


19/19

British Pound

British Pound to 1 US Dollar British Pound to 1 Euro

sterlized intervention

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