Sterilisation

In the financial literature, sterilization is a term commonly used to refer to a central bank's operations which mitigate the potentially undesirable effects of inbound capital - currency appreciation and inflation.

Depending on the source, sterilization can mean the relatively straightforward re-cycling of inbound capital to prevent currency appreciation and/or a wide range of measures to check the inflationary impact of inbound capital.

The classic way to sterilize the inflationary effect of the extra money flowing into the domestic base from the capital account is for the central bank to use open market operations where it sells bonds domestically, thereby soaking up new cash that would otherwise circulate around the home economy. [6] A central bank normally makes a small loss from its overall sterilization operations, as the interest it earns from buying foreign assets to prevent appreciation is usually less than what it has to pay out on the bonds it issues domestically to check inflation. However in some cases a profit can be made.[7]

In the strict text book definition, sterilisation refers only to measures aimed at keeping the domestic monetary base stable - an intervention to prevent currency appreciation that involved merely buying foreign assets without counteracting the resulting increase of the domestic money supply would not count as sterilisation