Buying foreign currency injects domestic money into the system. Left alone, that would loosen monetary conditions and push short rates away from target. Sterilising means simultaneously draining the same amount, usually by selling government bills, so the exchange rate operation does not become a monetary policy operation.
Unsterilised intervention is the more powerful of the two precisely because it does change the money supply, and therefore the interest-rate-differential that drives flows. Sterilised intervention works mainly through signalling and through shifting the balance of assets investors hold, and the evidence for lasting effect is mixed.
The distinction matters for traders because it tells you whether an intervention is a statement or a policy change. A sterilised operation against a widening rate gap is usually a speed bump.
Example: a central bank buys $5 billion, creating the domestic equivalent of $5 billion of reserves, then sells $5 billion of short-dated bills the same day. Bank reserves and the policy rate end where they started.
Related: central-bank-intervention, interest-rate-differential, fx-reserves, real-interest-rate