Foreign Exchange Intervention - Bank of Sierra Leone

9.
MECHANICS OF FX INTERVENTION
Three Main Tools:
1. Interest Rates or Unsterilized Intervention
» used by many small countries
When the central bank sells foreign assets, it is said to be purchasing
the domestic currency, and the purchaser of the asset has to pay the
central bank with either currency or domestic deposits. In either case,
this decreases the monetary base by the amount of the transaction. The
appreciation of the domestic currency causes the exchange rate to
increase. Conversely, the central bank can sell the domestic currency
by purchasing foreign assets which increases the monetary base, the
domestic currency depreciates and the exchange rate declines.
2. Sterilized Currency Purchases in Open Market
used by large countries, some small countries
The central bank can offset its international transaction with an
offsetting open market operation. In this case the monetary base and
money supply remain unchanged, so there is no change in exchange
rates.
3. Jawboning / Announcements: Talk, Talk, Talk
Please note that interventions (sterilized or unsterilized) can be accompanied by
statements to clarify the intent of the action.