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Explain why did the bsp decide to decrease policy rates

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Question 1: The Philippines' slower than expected Gross Domestic Product (GDP) growth has resulted in a flattening of the yield curve. Investors are buying long-term bonds, which decreased its yield; thus, increasing bond prices. Short-term bonds, on the other hand, has remained the same.

a. Why are bond investors buying the long-end more? Use the pure expectations theory in explaining your answer.
b. Although not all the time, why is flattening of the yield curve signifies a recession?

Question 2: The recent COVID-19 has put the country on lockdown for three (3) months. The Bangko Sentral ng Pilipinas (BSP) implemented a series of rate cuts in 2020 from 4% at the start of the year to only 2.25% by June. Why did the BSP decide to decrease policy rates?

Reference no: EM132688905

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