Question

Topic 1:

The target for overnight rate was 1.00% for a long time from September 8, 2010, but on January 21, 2015, the Bank of Canada lowered the target for the overnight rate to 0.75%, and on July 15, 2015 it lowered the target rate to 0.50%.

1. Why do you think the Bank of Canada decided to lower the rate?
2. What do you expect the movement of exchange rate of Canadian dollar?

Answer 1

At these rates, financial institutions including banks lend and borrow overnight loans among them. A reduction in the this key policy rate would result in increasing greater transactions of overnight loans and this is expected to raise market liquidity. This must be an aim of the Bank of Canada which was looking to push for increased money supply

Expectedly, this would reduce the value of  Canadian dollar by depreciating it when there are more  Canadian dollars in the market at the existing exchange rate. Hence  Canadian dollar would depreciate when overnight rate falls.