Here’s a wider view of the weir. See if you can see, in it, where the previous photo came from.
I’ve been using this weir as a metaphor for monetary policy’s use of interest rates recently. As mentioned, the weir is used to regulate the level of the river and lake by providing more or less water based on the angle of the weir spillgates themselves. Lets break down the roles involved quickly:
- lake = Bank of Canada reserve
- weir spillgates = interest rate
- river = economy
First lets explain why the weir is even there in reality. The river (update: the river flows FROM the lake) needs a decent level in order to operate effectively downstream. The river levels would be higher than necessary in the winter – when rain is plentiful and evaporation is minimal, so the weir levers would be relatively higher, but still open since they don’t want the lake to flood. In the summer, when river levels would otherwise be very low, the lake has enough water in it to drop the spillgates and provide more flow. This is important for many aspects of the river, not the least of which is fish and keeping the river relatively clean. This is the business of the river. Without water, things don’t move so good.
In Canada, we have an institution that manages the supply, cost, and availability of money. This institution lends to the banks, who then in turn lend to people and organizations for things like buying houses etc. This institution is called the Bank of Canada (BoC.) The banks base their interest rates for lending a little higher than what they can get from the BoC.
The BoC raises the interest rate (floodgates) to contract the money supply (increases level in the lake) to encourage saving. The BoC lowers the interest rate (floodgates) to encourage spending (increasing the level of the river, allowing more activity) – this happens since the cost of money is decreased through a lower interest rate.
So there you have it, an explanation of why the BoC dropped the interest rate to 0.25% this morning – it’s to open up the floodgates a bit, add some flow to the river, encourage spending and combat the recession.