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Definition

The process whereby the central bank eliminates the effect of purchasing foreign currency or some other cash injection on the money supply by selling government bonds through open market operations. The central bank is usually tasked with building up or maintaining the country's reserves of foreign currencies which involves them in buying such currencies on the open market in exchange for the country's currency. This has the effect of putting more of the country's currency into circulation. To counter this effect the central bank can sell government bonds in the open market thus removing money from the economy in exchange for bonds - which are not money. In this way they effectively sterilise their purchases of foreign currency. In January 2024, the South African Treasury came under pressure to use some of the country's gold and foreign exchange reserves, worth about $62,5bn, to reduce the government's deficit. In order to avoid the inflationary effect of such an injection of cash, the Treasury would have to sterilise it probably by buying back government bonds.

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