Sterilised Intervention

When a central bank or finance ministry buys or sells its own currency to influence its exchange rate, that operation mechanically changes the domestic money supply, buying the domestic currency (to support it) withdraws liquidity, while selling it injects liquidity. In a sterilised intervention, the central bank offsets this side effect through matching open-market operations (buying or selling government securities) so that the domestic money supply, and hence domestic monetary conditions and interest rates, remains unchanged. In an unsterilised intervention, no such offset occurs, and the intervention is allowed to alter domestic liquidity and monetary conditions directly. The trade-off between the two is a core theme in international monetary economics. Sterilised intervention preserves a central bank's freedom to pursue an independent monetary policy target (such as an inflation goal) while still attempting to manage the exchange rate, but because it does not alter the fundamental monetary conditions driving the exchange rate, its effect on the currency tends to be weaker and shorter-lived unless reinforced by a genuine change in the underlying interest-rate or growth differential between the two economies. Unsterilised intervention is more powerful precisely because it does affect monetary conditions, but at the cost of constraining domestic policy independence. Most intervention by advanced-economy central banks, including the US Federal Reserve and the Bank of Japan, is sterilised, which is why episodes like joint intervention typically need to be reinforced by other signals (statements of intent, coordinated participation by a second country) to have a durable effect on market expectations, rather than relying on the mechanical liquidity effect alone.

• 1 Sterilised intervention: currency-market operation offset by matching open-market operations, so domestic money supply is unchanged.
• 2 Unsterilised intervention: no offset; the intervention is allowed to change domestic money supply and monetary conditions.
• 3 Sterilised intervention preserves monetary-policy independence but tends to have a weaker, shorter-lived effect on the exchange rate.
• 4 Unsterilised intervention is more effective at moving the exchange rate but constrains independent domestic monetary policy.
• 5 Most advanced-economy central bank intervention, including recent US-Japan yen support, is sterilised.
• 6 The RBI's own interventions in India's managed float are generally understood to be sterilised, to protect its independent monetary policy stance.
• 7 Connects to the impossible trinity: a country cannot simultaneously fix its exchange rate, keep capital mobile, and run fully independent monetary policy.

The August 2026 US-Japan joint yen-buying intervention was widely read as sterilised, since neither central bank altered its underlying monetary policy stance, which is why analysts expected its effect on the yen to fade without reinforcement from a genuine narrowing of the US-Japan interest-rate gap.