The ECB lends money to banks at the official interest rate. This is one way for banks to get financing to do their business: they borrow from the ECB and lend it to other banks, to companies, and to you and me. When banks lend money to their clients, they charge an interest rate and a commercial margin based on the same idea we mentioned earlier: the cost of not being able to use the money otherwise and the risk of repayment. The mean of all these interest rates gives the Euribor rate, which we will discuss in another article.
Therefore, when the ECB lowers the interest rate at which it lends to banks, implicitly it is lowering the Euribor rate which directly or indirectly affects the price of lending for all of us.
And the effect of this? If borrowing money is cheaper, companies and individuals will borrow money to invest (from big factories to a new moped) driving prices upward, i.e. increasing inflation levels. A lower interest rate means also that savings deposits pay less, so again companies and individuals will rather invest the money in, for example, shares than park it with the bank. All of this spurs on economic activity, and that’s a good thing in times of crisis!
So next time Draghi speaks, you might want to pay attention: it could help you decide whether to go on a luxury vacation or just visit some family…