What Is an Unsterilized Forex Intervention?
A country's monetary authorities attempt to influence exchange rates and its money supply by not buying or selling domestic or foreign currencies or assets.
This is a passive approach to exchange rate fluctuations and allows for changes in the monetary base.
How Unsterilized Forex Interventions Work
Central banks may be able to weaken a currency by selling their reserves on the market. They can also strengthen it by buying more and selling their currency. Sterilization happens when authorities offset the purchase of foreign currencies or securities by selling domestic ones, therefore dropping its money supply. Central banks use sterilization to insulate or protect their economies against any negative impact from things like currency appreciation or inflation—both of which can reduce a country's place in export competitiveness in the global market.
Sterilization can be used to insulate or protect economies against any negative impact from currency appreciation or inflation.
When central banks implement unsterilized foreign exchange intervention, they do not put insulation measures in place. Therefore, the transaction is one-sided—only purchasing or selling currencies or assets—without being offset. The policy allows foreign exchange markets to function without manipulating the supply of domestic money. This means that a country's monetary base is allowed to change.