While foreign exchange interventions can stabilize local currency valuations, maintaining large-scale sterilization programs over an extended horizon can introduce significant operational costs onto the central bank’s balance sheet.

To absorb the excess domestic liquidity generated by continuous foreign currency purchases, central banks must issue their own short-term debt instruments, known as Central Bank Bills, or pay interest on large commercial bank reserve balances:

Sterilization Net Margin = Yield on Foreign Reserve Assets - Interest Cost of Central Bank Bills

If domestic policy interest rates are significantly higher than the yields earned on international reserve holdings (e.g., US Treasury yields), the central bank faces a negative spread. This operational drag can lead to financial losses, requiring careful calibration of liquidity absorption settings to preserve the bank’s financial autonomy.