What does monetary intervention lead to? Central bank foreign exchange intervention
Central banks of various countries today use interventions in the foreign exchange market in order to change foreign exchange quotations. In some cases, they are carried out by the regulators of several Central Banks at a time in the interests of a particular state. For example, foreign exchange interventions by the Bank of Europe, the Bank of Japan and the Federal Reserve in 2011 led to a drop in the exchange rate of the yen by 2 percent. This made it possible to provide assistance to the state's economy after a major earthquake.
Features of the intervention
The Central Bank's intervention in the country's foreign exchange market has the necessary impact on the market in order to change the exchange rate of the currency in any direction. When they are implemented, a significant sale or purchase of currency by the Central Bank is made. If it is required to reduce the exchange rate, its supply is increased; if it is necessary to increase it, the opposite operation is performed. The rule applies here: the higher the demand for a certain currency, the higher its price.
In addition to changing currency quotes, interventions are used to control the volatility of the foreign exchange market, create incentives to attract and outflow capital from the country, manage liquidity, and build up reserves of central banks. Thanks to them, it is possible to take control over the quotations of the state currency against the currencies of other countries. Typically, interventions are carried out in the short term.
Today, the Central Bank's interventions in the foreign exchange market are of two types: real and fictitious. In the first case, the regulator actually sells or buys foreign currency. During fictitious interventions, he only speaks of his intentions, but in fact does not implement them. Their effect is short-lived, and their purpose is also to change quotations.
Ruble interventions and their features
Ruble interventions mean the impact on the exchange rate of the ruble by the Central Bank of the Russian Federation to protect the interests of the state.
Central Bank interventions today Russian Federation in the foreign exchange market are mainly aimed at adjusting the exchange rate national currency against the dollar and euro. In the period 1995-2008, a currency corridor operated in Russia, after which a dual-currency basket was used. This means that the regulator kept the ruble exchange rate within certain limits. If it approaches one of the borders, the Central Bank of the Russian Federation enters the market and makes purchases and sales. In 2015, the regulator decided not to intervene in the foreign exchange market, sending the ruble into “free float”.
Goals of Central Banks' Entry into the Currency Market
Central Bank intervention in the foreign exchange market today is a powerful method. The Central Bank of the Russian Federation uses this method only in serious situations when other methods (monetary, interest rate) do not help to correct the situation.
Usually interventions are used in order to prevent the ruble from losing its exchange rate and to maintain the purchasing power of the currency, and its purpose may also be to replenish foreign exchange reserves by a mega-regulator.
In 2014, the Bank of Russia often intervenes, sometimes almost $ 3 billion a day. They pursued a goal - to warn because of the sanctions imposed against the Russian Federation and geopolitical tensions.
Today, the Central Bank's interventions in the foreign exchange market play an important role. Although now the Bank of Russia has promised not to carry out major transactions for the purchase and sale of currencies, it is always ready to enter the market in case of emergency.
One of the main activities of the Central Bank of any state is monetary regulation of the economy. Its most important component is to ensure the stability of the national currency exchange rate to foreign ones. It would seem that the exchange rates of many countries of the world are established in accordance with supply and demand. However, the Central Bank has the ability to change the situation by influencing the value of the currency. Of course, you can't just announce some kind of monetary exchange rate. To influence its dynamics, such a method as conducting an intervention is used.
The procedure itself is a large-scale purchase or sale of domestic treasury notes the central bank states for a short period of time. This procedure allows you to achieve a certain level of the national currency so that it becomes cheaper or more expensive by international market... A fall in the exchange rate causes an increase, and a decrease in supply leads to a strengthening of the currency. Simply put, the less money the market has, the more expensive the currency.
Usually any central bank makes a public announcement in advance about the purchase or the money-throwing. Such information is of particular importance for investors, because a calculation made without proper consideration of the upcoming quotes can cause financial disaster.
5 reasons to apply currency intervention
Types of Central Bank intervention
- real, when the central bank actually buys or throws in currency,
- fictitious, when it only announces the intention to carry out procedures, but does not perform them.
The results of the money buy-up or stuffing
Carrying out this kind of regulation or information about it in some cases causes panic in the domestic and world markets, leads to speculation, which sometimes negatively affects currency quotes. Aligning the periods of intervention in the global market can change economic situation a number of states, because the exchange rate affects:
Thus, the correct policy of the Central Bank for the introduction or withdrawal of currency has a positive effect on the welfare of the economy of the state and the population. Today, when the "walks" of the economic crisis are observed in different countries ah, many central banks use interventions. And not only to increase the rate, but also to decrease it.
For example, the Japanese yen exchange rate is traditionally high. However, the Japanese economy is mainly export-oriented and is not profitable for the currency, which negatively affects the competitiveness of the goods that are produced in the country.
Therefore, the recent intervention made it possible to painlessly solve this problem. And the currency interventions of the Central Bank of the Russian Federation made it possible to avoid the collapse of the national currency. the domestic currency does not get out of control and is carried out smoothly.
The practice of interventions by the Central Bank of the Russian Federation
In the past two years, against the backdrop of ongoing events in Russia, the use of financial levers has been actively practiced, including the use of various instruments by the Central Bank. Under the intervention of the ruble, one should understand the impact on the quotation of the domestic currency in the public interest. Basically, such a procedure was carried out in order to regulate the ratio betweenrubles, US dollars and euros. The resource-based type of economy prevents imports from having a positive effect on the growth of domestic Money, cost. Therefore, a systematic injection of foreign hard currency is mandatory. Without such measures, the risk of economic collapse is high.
Since 1995, the Russian Federation has used a currency corridor - declaring the minimum and maximum exchange rate of the ruble against the US dollar for a certain period. The obligation of the Central Bank was to maintain it at a given level. When the rate approached the lower boundaries of the corridor, the Russian Central Bank was purchasing the national currency. If the quotations reached the upper values, he sold the national currency, threw it into the market in order to reduce the rate. The use of the dual-currency corridor in the Russian Federation was established in 2008 for the euro and the US dollar.
Having an idea of what intervention is, defining it in simple words and the algorithm for influencing the economy and the foreign exchange market, it becomes clear that its goal is to stabilize the purchasing power of the ruble, prevent an excessive reduction in the foreign exchange reserve of the Central Bank, and not only.
The Central Bank of the Russian Federation resorts to interventions in special cases when the use of monetary methods no longer brings positive results. As a rule, major interventions are carried out once or twice a year, small monetary operations of this kind - more often. For example, in 2014, the Central Bank of Russia made a large-scale currency injection by selling:
- 23 October about 2.736 billion US dollars,
- October 26 $ 2.444 billion,
- October 27 $ 2.49 billion.
The purpose of these sales is to prevent an instant weakening of the national currency rate, since it was negatively affected by the geopolitical situation and the international sanctions adopted against Russia.
In November 2014, by the decision of the Central Bank of the Russian Federation, the corridor of the dual currency basket was canceled. The ruble was allowed to float freely. They also announced the refusal to carry out regular interventions until the fluctuations in the national currency rate turn into a threat to the country's financial stability. The rise in inflation and devaluation in the country is associated with such decisions.
What are the forecasts for 2016
The Ministry of Finance of Russia has published the preliminary results of January. According to the data, there is an excess of the RF budget revenues over its expenditure side by 390.19 billion rubles. The main part of the surplus is the revaluation of the cost of reserves and money due to the depreciation of the ruble. According to Ruslan Grinberg, head of the RAS Institute of Economics, this negative situation is caused by ineffective monetary policy. He believes that in the pre-crisis stage, the state is obliged to increase the amount of expenditures, which should be greater than income, otherwise the economy will not be able to cope with solving the problems.
The Central Bank of the Russian Federation has other proposals. He states that the volatility of the national currency can be raised by:
- interventions from international reserves,
- rebound in oil prices,
- structural changes in the state economy.
At the same time, the Russian Central Bank is not going to slow down the fall in the volatility of the national currency by reducing the size of the key rate and cash purchases and stuffing. The priority, in the opinion of the regulator, should be the diversification of the economy.
Forecasts for the rate of the Russian national currency are now largely dependent on the price per barrel of oil, which is poorly predictable. According to Igor Kovalev of InstaForex Group of Companies, if its cost is more than USD 30, there will be a limited exchange rate drop Russian ruble... According to research by economists Bloomberg, the Russian Central Bank will force an intervention at a cost of the US dollar in the amount of 90 rubles. And Sberbank CIB analysts in the review financial market predicting the resumption of banking interventions at a cost of a barrel of oil 15-25 US dollars.
Understanding what is the intervention of the ruble in the Central Bank, what it is and how it happens, you can use information about monetary transactions when planning personal welfare adjustment.
Foreign exchange intervention- action central bank countries in the foreign exchange market, aimed at maintaining or weakening the national currency, during which, at a time or in limited period time, a large amount of currency is bought or sold. The task of foreign exchange intervention is to maintain the exchange rate in the interests of the state.
Quite often, foreign exchange interventions in the world market are carried out not by one central bank, but by a number of banks from different countries in accordance with their agreement among themselves.
An example is the decision of the G7 to support the Japanese economy and make it more competitive by depreciating the Japanese yen against the US dollar after the earthquake. On March 18, 2011, as a result of a concerted action by the Bank of Japan, the European Central Bank and the US Federal Reserve, the price of the Japanese currency was reduced by more than 2% within a few minutes.
In addition to drastic agreed changes in exchange rates, foreign exchange interventions can be used to control the volatility (variability) of the exchange rate, reduce the rate of its change, maintain liquidity in the foreign exchange market, counteract or facilitate the import or export of capital, as well as for the accumulation of central bank reserves in a certain currency.
Similarly, the Bank of Russia periodically conducts foreign exchange interventions to manage the exchange rate of the ruble against the euro and the US dollar. Until July 8, 1995, the Central Bank of the Russian Federation held back the ruble rate by means of foreign exchange interventions, as a rule, by selling foreign currency. On July 8, 1995, the so-called currency corridor was introduced - the minimum and maximum exchange rate of the ruble against the dollar declared by the bank for a certain period. Since 2008, a dual-currency corridor has been established - in relation to the dollar and the euro. In fact, the currency band is a statement by the regulator that it is ready to conduct currency interventions, buying the national currency if its quotation touches the lower border, and selling if the upper one is reached.
In 2015. For the first time, the Bank of Russia introduced interventions to replenish international reserves. May to July 2015 he bought foreign currency at exchange market... The interventions were not intended to influence the ruble exchange rate and were carried out in small amounts of $ 100-200 million evenly throughout the day. In total, $ 10.1 billion was purchased. However, due to the unfavorable situation in the foreign exchange market, the interventions were stopped. According to the Bank of Russia, it is planned to carry out interventions to build up reserves until the volume of reserves grows to $ 500 billion. The announced figure is a long-term benchmark without commitments in terms of time and amount of regular transactions. In 2016-17, there were no interventions to replenish international reserves. Their resumption is possible if price stability, low inflationary expectations and a stable ruble exchange rate are achieved.
Currency intervention is a term denoting the actions of the Central Bank to change the exchange rate of the national currency. Used to influence the country's economy. Success depends on the availability of financial reserves, the need for changes in economic performance, support of the Central Bank by the leading players in the financial market.
One of the key tools in banking system the country is foreign exchange intervention. This term is often used by traders, financial analysts, politicians.
Currency intervention - what is it? In your own words, you can call it an urgent measure to regulate the exchange rate in the interests of the state (several states). It consists in buying (selling) a large number of foreign banknotes at attractive prices from the population for a limited period of time. The goal is to weaken or support the national currency. In professional circles, it is often called "the last trump card of the Central Bank."
What factors influence the effectiveness of this "trump card"?
- The Central Bank has sufficient financial reserves
- There is a pronounced need for changes in global economic indicators
- The Central Bank's policy is shared by the leading players in the national financial market
If several states at once unite in order to influence economic system third countries, they can start buying / selling foreign currency or gold. Thus, they will carry out international foreign exchange intervention.
This measure of influence is also applied for the purposes of
- slowing down changes in course
- support the value of financial assets (liquidity)
- control of the level of risk (volatility)
- obstructing / creating conditions for the export / import of capital
- accumulation of foreign exchange reserves
This is how the Central Banks - participants in the survey of the Bank for International Settlements in 2013 determined the goals of their foreign exchange operations (see Table 1)
* S.R. Moiseev. Foreign exchange interventions. The motives of central banks and their tools. - "Money and Credit", No. 3, 2016
Types of foreign exchange intervention
So, foreign exchange intervention is the lever by which the state influences the country's economy. Experts distinguish between two main types: verbal and real.
Verbal is carried out by the Central Bank much more often and consists in the predictability of the market reaction to any rumor about a change in the exchange rate. The technology is simple: without any official confirmation, information about a possible change in the currency market is launched to the masses. For example, politicians or officials of the Ministry of Finance (Treasury), the Central Bank give an oral negative assessment of the prevailing money market situations or threaten real intervention (buying or selling foreign money). This method is the cheapest, because it does not involve the use of gold and foreign exchange reserves, but it is not always effective. Rumors "work" only in those countries where the Central Bank has repeatedly carried out real actions for the short-term purchase / sale of foreign banknotes.
A real intervention is a serious action, widely covered in the media, with the publication of all data on the funds spent, goals, and results. For its implementation, the Central Banks of other states, also interested in this process, can be involved. It differs from the verbal one in that it is carried out exclusively through commercial banks. Moreover, each financial market player acts on behalf of the Central Bank.
In addition, it carries a number of risks: since it always involves gold reserves countries, with serious violations in the balance of payments system, they can be depleted, while not preventing the fall of the national currency.
How to determine the success of a foreign exchange intervention
To determine the effectiveness of the "last trump card of the Central Bank" it is customary to use the following criteria:
- "direction"- when buying the national currency of the Central Bank, its rate is planned to decrease or increase
- "smoothing"- when the exchange rate falls, the decrease in the national currency should be smooth, and if it grows, then the increase should be gradual
- "Reversal"- implies a reversal of the trend of the national currency, when “increase (decrease) exchange rate in the previous period and its decrease (increase) in the present follows the purchase (sale) of the national currency "(S. Moiseev, Doctor of Economics, Director of the Financial Stability Department of the Bank of Russia)
In Russia, from February 1, 2009 to November 10, 2014, quite a few interventions were carried out. According to analysts, the Central Bank intervened in market operations every second day out of 1439 trading days(see Fig. 1).
This is the most successful period over the past 17 years, as 80% of the Central Bank's actions were found to be effective according to one of the criteria. In 50% of cases, it was possible to smooth out exchange rate fluctuations, in 25% - to reverse the exchange rate dynamics in our favor (see Table 2)
** S.R. Moiseev. Currency Interventions: International Practice and Effectiveness of Interventions ”. - "Money and Credit", No. 5, 2016.
Examples from history
1. In 2011, the Japanese authorities set a course for the weakening of the national currency - the yen. The reason is the difficulties in the economy of the United States and the European Union, which also affected the Land of the Rising Sun.
The active actions were preceded by a statement by the country's finance minister that, due to speculation in the money market, the yen was overvalued against foreign currency, which does not correspond to the state of the state's economy.
It was decided to regulate it with the help of several large transactions for the purchase of foreign banknotes. As a result, the “stuffing” of several trillion yen into the market depreciated the Japanese national currency by 2% and balanced its economy (see Fig. 2)
2. For several years, the authorities of Belarus have been taking measures to strengthen the course Belarusian ruble... The economy of this country is closely connected with the Russian one, therefore, it is fully influenced by foreign sanctions, and import substitution, and the global economic crisis.
In 2015, the Prime Minister of Belarus A. Kobyakov announced his readiness to introduce urgent measures in order to “smooth out” exchange rate fluctuations. At the same time, he noted that the gold reserve would not be affected. Thus, the Prime Minister actually explained the situation at the auctions of the Belarusian Currency and Stock Exchange: when the next decline in the Belarusian ruble begins, the volume of currency trades increases on it - that is, a currency intervention is carried out.
Foreign exchange intervention these are purposeful actions of the Central Banks of different countries in relation to foreign exchange market carried out by buying or selling foreign currency in fairly large sizes.
Foreign exchange intervention carried out during periods of instability of domestic money in order to equalize the exchange rate of the national currency and maintain its quotations in the required currency corridor. Intervention is synonymous with intrusion, intervention.
Such currency operations are one of the main instruments of the monetary authorities (i.e. the Central Bank) in the implementation of the state's monetary strategy. The need to regulate the exchange rate by performing foreign exchange interventions arises in the presence of a floating exchange rate regime, which appeared in 1976 at the time of adoption by a number of countries (a floating regime assumes that the exchange rate develops spontaneously, under the influence of direct market factors).
To be able to carry out foreign exchange interventions, the central banks of different countries accumulate in their assets the so-called - this monetary units the most powerful economic powers in the world, possessing such characteristics as stability, stability and high liquidity. Today, the main reserve currencies in the world are (Dollar), (Euro), (British Pound Sterling), (Japanese Yen) and (Swiss Franc).
Currency interventions and FOREX
VIs can be of two types - direct and indirect. In the case of direct transactions, everything happens officially, under the gun of the media - the Central Bank buys or sells currency on its own behalf, specifying the amount and date of the transaction.
In the case of indirect interventions, transactions are carried out Commercial Banks on the instructions of the Central Bank - such interventions are not advertised, they are more unexpected, which means they have a stronger effect on Forex market(and can be both in the direction of the existing trend, and against it).
Direct foreign exchange interventions in Russia
Official figures for these operations in Russia are published monthly on the website of the Central Bank of the Russian Federation (the delay in publication is two months). Domestic monetary authorities influence the value of the ruble in terms of the American dollar, as well as the Euro. When the Bank of Russia sells USD, it aims at strengthening the ruble exchange rate and at its growth. When the Central Bank of the Russian Federation undertakes the purchase of USD, it seeks to slightly reduce the value of the ruble, to weaken it.
Thus, by performing foreign exchange interventions, the state levels out the existing market demand and supply of its own money, thereby helping to stabilize market fluctuations and significantly reduce the risk of economic instability due to sharp jumps in the value of money.