Reference no: EM132498159
Read the following news: Bank of Canada cuts key rate to 0.25% as virus, oil fallout deepens
Mar 27, 2020
The Bank of Canada announced a large-scale asset purchase program and cut its benchmark interest rate to a record low in a bid to ease financial-market strain and shield the nation's economy from coronavirus fallout.
The central bank lowered its policy rate Friday by another half a percentage point to 0.25 per cent, adding in a statement that the unscheduled decision brings the benchmark as low as policy makers are willing to take it for now. It also announced for the first time it plans to start buying a minimum of $5 billion (US$3.5 billion) a week in government securities as well as short-term debt issued by companies.
The move was necessitated by quickly deteriorating conditions, including a flood of new jobless claims last week, that suggest the economy is poised to suffer one of the sharpest drops in economic activity in history. The energy-heavy Canadian economy is also having to contend with the crash in oil prices. At a press conference, Governor Stephen Poloz said the primary objective is to restore proper functioning in the financial system, which he said remains extremely strained, particularly for a commercial paper market that has "frozen."
"The intent of our decision today is two-fold: to immediately support the financial system so it keeps on providing credit, and, over the longer term, to lay the foundation for the economy's return to normalcy," Poloz said in his opening statement.
Why did the Bank of Canada cut interest rate? Please relate it to the BoC's goal of monetary policy.
The announced large-scale asset purchase program is used by the BoC for the first time. How is this monetary policy tool different from conventional open market operations? Why is this unconventional policy tool used at this time? How can you relate it to the BoC's monetary policy goal?
What would happen to bond price and yield immediately after this announcement (but before the actual purchase)? Briefly explain, referring to the asset demand theory.