Foreign exchange intervention is a monetary policy of a nation’s central bank. It is aimed at controlling the foreign exchange rates so that the interest rates and thereby the inflation in the country is kept under control.
Many developed countries nowadays believe in non-intervention. It has been backed by research that intervention may not be a good policy for the developed economies. However, the recession has again brought the topic under consideration as whether Forex intervention is really necessary to keep the economy affluent.
Foreign exchange intervention is an intervention of the central bank of a nation to influence the monetary fund’s-transfer rate of the national currency. Central banks generally intervene in the Forex market to increase the reserves, stabilize the fluctuating exchange rate and rectify misalignments. The success of intervention depends on the sterilization of the impact, and the general government macroeconomic policies.
There are mainly two difficulties in an intervention process. They are the determination of the timing and the amount. These decisions are often a judgment and not a set policy. The reserve capacity, the country’s exact type of economic troubles, and its fluctuating market conditions affect the decision-making process.
Forex interventions can be risky because it can degrade the central bank’s credibility in case of a failure.