What are foreign exchange auctions?

Published: 5/6/2020

Foreign exchange auctions are one of the instruments of the monetary policy.

The Croatian National Bank mostly uses outright operations, notably foreign exchange purchase and sale operations, i.e. foreign exchange auctions. The aforementioned operations may be considered fine-tuning operations, but on certain occasions they are also structural. Foreign exchange auctions are performed in order to ensure the stability of the domestic currency and maintain payment liquidity both in the country and abroad. Using foreign exchange auctions, the CNB seeks to affect the exchange rate of the domestic currency relative to a reference foreign currency. The Croatian National Bank conducts foreign exchange auctions when it considers it necessary to mitigate exchange rate movements of the kuna against the euro. By purchasing foreign currency, the central bank provides domestic currency, increasing the amount of domestic currency in circulation and simultaneously withdrawing foreign currency from circulation. As a result, it causes the domestic currency to depreciate. In the opposite case, by selling foreign currency, the central bank withdraws domestic currency from circulation, causing it to appreciate relative to the reference foreign currency.