FX interventions

Insights from a Markets Committee Workshop chaired by Gerardo García López (Bank of Mexico)

Foreign exchange (FX) interventions can be an important component of the policy toolkit, particularly in emerging market economies (EMEs). This paper summarises insights from a Markets Committee workshop on FX interventions, and supplements them with evidence from a background survey of 21 central banks.

The paper touches on intervention goals and objectives, benefits and costs, and then considers the intricacies of intervention such as the timing, size or means of execution. It presents insights about the effectiveness and communication of FX interventions.

During the Covid-19 pandemic, FX interventions were part of central banks' responses in addressing market dysfunction and moderating excessively strong capital flows during periods of volatility, but central banks have employed them to achieve a range of goals and objectives. And while central banks generally considered FX interventions to be effective, they are not a panacea as they have some costs. Communication can help increase the benefits and reduce the costs of FX interventions, but there are limits to what it can achieve. A clear understanding of intervention goals supported by communication, consistency with other polices and good execution are all preconditions for interventions to succeed. In general, the first line of defence against destabilising capital flows should be the exchange rate itself, together with sound economic fundamentals.

Policy objectives and the specific circumstances warranting an FX intervention matter for the optimal choice of intervention timing, size, instrument, means of execution and choice of counterparty. Market intelligence is a crucial input into FX intervention decisions, particularly given the increasing fragmentation, complexity and sophistication of FX markets.