1. Open market operations that effect the setting of interest rates in the economy (this has been covered)

2. Influencing the Exchange Rate of the Australian dollar

3. Persuasion on lending by financial institutions

Australia has a floating Exchange Rate against other currencies. The Exchange Rate is determined by the demand and supply of currencies between two countries based on the amount of trade.

At some point in time the Australian exchange rate may, in the short term, fall or rise significantly against other currencies.

This can cause shocks to the economy such as a rapid rise in import prices causing increased inflation.

The Reserve Bank may intervene in the foreign exchange market to sell $Aust or buy $Aust to keep the exchange rate stable.

It does this by using the reserves of foreign currency it has accumulated.

This is called a “dirty float”.

This can only be used “short term”

Scenario 1:

The Australia dollar is deprecating too fast. This will mean the $Aust is being sold on foreign exchange markets. A fast depreciation will lead to immediate increase in import prices that could increase Inflation.

Action: The Reserve bank will buy $Aust on the Foreign Exchange market increasing the demand for $Aust and making the depreciation slower over time.

Scenario 2:

The Australia dollar is appreciating too fast. This will mean the $Aust is being purchased on foreign exchange markets. A fast appreciation will lead to immediate increase in export prices that could severely reduce exports.

Action: The Reserve bank will sell $Aust on the foreign Exchange market increasing the supply for $Aust and making the appreciation slower over time.

The Reserve Bank uses persuasion to try and influence the direction of lending of financial markets.

In contractions/recessions there are attempts to talk up lending and spending and in expansion/booms attempts to talk down lending and spending.

This year 2015, the Reserve bank has been talking down lending by financial institutions to the property market, especially in Sydney where it is deemed to be “out of control”

The Reserve Bank has issued a fresh warning about the rising risk of a significant fall in house prices if "speculative demand" fuelled by cheap credit continues to drive the property market.

With investor buyers powering a house price boom in NSW especially, the central bank on Wednesday said the risks in residential and commercial real estate were rising, and this could have consequences for the broader economy if it continued.

The RBA's latest Financial Stability Review reinforced its concerns about speculative buying by investors in the property market, which has continued in the opening months of 2015.

In NSW, the RBA said new lending to property investors had surged by almost 150 per cent in the past three years.

Sydney Morning HeraldMarch 26 2015