Central bank intervention

An operation in which a central bank, usually acting for its finance ministry, deals in its own currency to influence the rate. Direct intervention exchanges reserves for the currency in the market. Verbal intervention, sometimes called jawboning, achieves the same aim by statement alone. Coordinated intervention involves several authorities acting together on the same side, which is rare and historically the most effective form.

Intervention is described as sterilised when the domestic money supply effect is offset by an opposite operation, so the exchange rate is targeted without changing monetary conditions, and unsterilised when it is not. Some authorities announce operations, some confirm them only later in reserve statistics, and some never confirm them at all, which means the market frequently trades on the suspicion of intervention rather than on its confirmation.

The economic evidence is genuinely mixed, and this is where practitioners disagree most. Studies find that unsterilised and coordinated operations have moved rates durably, while isolated sterilised operations against a strong trend have often been absorbed within days. What is not disputed is the market effect at the moment it happens: liquidity thins, quotes gap, and the size of the move bears no relation to the size of any scheduled release. A currency peg is intervention made permanent, which is why pegged rates sit still until the authority can no longer hold them.