Intervention of the Central Bank. Currency interventions: definition, mechanism

Today, a policy of a managed exchange rate of the national currency is being implemented in many countries of the world, for which the state Central Banks conduct so-called currency interventions optimized for a certain value of the domestic currency. After releasing the rate of national currency in free navigation, you can get problems in the economy. What is the currency intervention of the Central Bank, and how it is conducted - this should be examined in more detail.

Definition of the concept of intervention

Currency intervention is a one-off transaction for the purchase or sale of foreign currency in the Russian Federation carried out by the Bank of Russia. At the same time, the volumes of currency interventions are usually quite large. Their goal is to regulate the exchange rate of the national currency in the interests of the state. Basically, such actions are implemented in order to strengthen the national currency, but sometimes they can be aimed at weakening it.

Such operations can significantly influence both the foreign exchange market in general and the rate of a certain monetary unit. Currency interventions are initiated by the Central Bank of the country and, basically, they are the main method of currency policy. In addition, the regulation of currency relations, especially when it comes to third world countries, occurs in conjunction with other IMF participants. To participate in such events, banks and treasuries are involved, and manipulations are carried out not only with currencies, but also with precious metals, in particular gold. The monetary intervention of the Central Bank is carried out exclusively by prior agreement and is carried out at specific, pre-agreed times.

Mechanisms for raising and lowering the national currency

In fact, the mechanism for regulating the exchange rate of the national currency is very simple, and it was built on the basis of the principle of "supply and demand". If it is necessary to increase the value of domestic money, the Central Bank of the country starts actively selling foreign currency (mostly dollar), while any other convertible currency can be used. Thus, the intervention of the Central Bank leads to an overabundance (increased supply) of foreign currency in the financial market. Simultaneously, the Central Bank buys the national currency, which generates additional demand for it, why the rate can grow even faster.

In the opposite way, the Central Bank's currency intervention is aimed at weakening the rate of the national currency, which is being actively sold, not allowing it to grow in value. The purchase of foreign banknotes leads to their artificial shortage in the domestic market.

Types of currency interventions

It is noteworthy that not always the intervention of the Central Bank involves buying and selling a large amount of currency, from time to time a fictitious procedure can be conducted, sometimes it is called verbal. In such cases, the Central Bank issues a rumor or a "duck", so that the situation in the foreign exchange market can change significantly. Sometimes fictitious intervention is used to enhance the effect of real currency intervention. Also very often, several banks can pool their efforts to achieve the desired result.

Practice shows that the verbal intervention is used by the Central Banks much more often than the real one. A big role in such cases is played by the surprise factor. In any case, the intervention of the Central Bank, aimed at strengthening the existing trend in the currency market, is usually more successful than manipulation, whose purpose is to reverse it.

Currency intervention on the example of Japan

A lot of cases of manipulation in the foreign exchange market are known. For example, in 2011, due to the difficulties in the economies of the United States and the European Union, Japan had to adjust the exchange rate of the national currency, and the country's authorities were forced to reduce it. Japan's finance minister said that speculation in the foreign exchange market caused the overvaluation of the yen against foreign currency signs and this state of affairs does not correspond to the state of the country's economy. Subsequently, it was decided to adjust the yen's rate in conjunction with the Central Bank of the Western countries, for which Japan made several major transactions for the purchase of foreign currency. The introduction of trillions of yen to the foreign exchange market helped reduce its rate by 2% and balance the economy.

The use of financial leverage in Russia

A vivid example of the use of financial levers in Russia can be observed since 1995. Until then, the Central Bank had sold foreign currency to regulate the ruble, and in July 1995, the principle of the currency corridor was introduced, according to which the value of the national currency should be maintained within established limits and for a certain period of time. However, changes in the world economy by 2008 made this model of monetary policy ineffective, after which a bi-currency corridor was introduced. In this case, the ruble was regulated on the basis of its relation to the dollar and the euro. One way or another, the Central Bank conducts currency interventions by following this monetary policy.

The events of 2014-2015 influenced the fruitfulness of the currency interventions conducted by the Central Bank of Russia, so the recent manipulations did not yield the desired result. The fall in oil prices, the associated reduction in the Central Bank's reserves and the budget mismatch ultimately make currency interventions irrational and meaningless.

Alternative to a regulated exchange rate

Today, Russia is heavily dependent on the export of hydrocarbons, which impedes the growth of the national currency. Therefore, such financial leverage as the intervention of the Central Bank, through which the dollar and euro are systematically pouring into the market, is simply necessary for the country's economy. However, in the light of the recent events, when the Central Bank's interventions stopped helping to control the cost of the national currency, from November 10, 2014, the transition to the floating ruble exchange rate was implemented. Now, currency interventions are conducted only in exceptional cases.

Perhaps, this article provides an exhaustive answer to the question, what is the currency intervention of the Central Bank, so it will be superfluous to go into the finer points of the finer points of financial instruments.