European Central Bank President Mario Draghi indicated on Thursday that the bank can reduce rates further if needed and it stands ready to act when necessary given the rising money market rates.

"Our monetary policy stance will remain accommodative for as long as necessary, in line with the forward guidance provided in July," Draghi said in his introductory statement presented in the post-decision press conference in Frankfurt.

"The Governing Council confirms that it expects the key ECB interest rates to remain at present or lower levels for an extended period of time," he reiterated. Asked why the bank is not tying its guidance to some specific indicator, he said the ECB's guidance is 'qualitative' and it is appropriate.

Earlier today, the 23-man Governing Council led by Draghi held the main refinancing rate unchanged at a record low 0.50 percent as expected for the fourth month. In May, the bank slashed the rate by quarter-basis points, which was the first rate cut in nine months.

Responding to questions from the press, Draghi said policymakers did discuss a rate cut in today's rate-setting session. Some policymakers said the economic recovery is "very green", while others said the current improvements in the economy does not justify a rate cut, he added.

Draghi pointed out that money markets have been influenced by a gradual reduction in excess liquidity. "Repayments of funds taken up in the context of the three-year longer-term refinancing operations reflect improvements in financial market confidence, some reduction in financial market fragmentation and the ongoing deleveraging by euro area banks," he said.

"We will remain particularly attentive to the implications that these developments may have for the stance of monetary policy."

He also told reporters that the central bank remains alert to the geopolitical risks that could arise from the conflict situation in Syria and is watching the financial market developments in emerging markets. Several emerging economy currencies have depreciated sharply after the U.S. Federal Reserve made its 'tapering' announcement in May.

The ECB expects euro area output to recover at a slow pace due to a gradual improvement in domestic as well as foreign demand and as the financial market improvement starts to feed into the real economy. That said, high unemployment and necessary balance sheet adjustments in the public and private sectors will continue to weigh on economic activity, Draghi noted.

The latest ECB staff macroeconomic projects released today showed an upgrade to the GDP forecast for this year. The 17-nation economy is expected to shrink 0.4 percent this year, which is less than the 0.6 percent contraction forecast in June. However, the growth outlook for 2014 was cut to 1 percent from 1.1 percent.

"The risks surrounding the economic outlook for the euro area continue to be on the downside," Draghi said.

Further, Draghi said the underlying price pressures are expected to remain subdued, given the weakness in aggregate demand and the modest pace of the recovery. Medium to long-term inflation expectations continue to be firmly anchored in line with price stability, he said.

The ECB staff raised the 2013 inflation projection to 1.5 percent from 1.4 percent, while the forecast for 2014 was left unchanged at 1.3 percent. "The risks to the outlook for price developments are expected to be still broadly balanced over the medium term," the central bank chief said.

According to Draghi, the fragmentation of euro area credit markets must ease further and the resilience of banks must be strengthened where needed, to ensure an adequate transmission of monetary policy. Further decisive steps to establish a banking union will help to accomplish this objective, he said. The central banker also noted that discussions towards establishing the Single Supervisory Mechanism have progressed considerably and expects some positive news on the same in coming days.

Answering a question on a third bailout for Greece, Draghi said any extension of the Greece bailout, which stops at the end of 2014, would require more conditionality. Further, he said the ECB is not ready to take losses on its Greek bond holdings. He ruled out any debt relief for Greece and said that the ECB cannot undertake monetary financing for any member state.

Regarding Ireland, Draghi said the program implementation is on track, but challenges remain, especially in the financial sector. He also said it will be decided in due time whether the country will need a backstop to exit the program.

Turning to Spain, the ECB chief said the Spanish bank assistance program remains on track and the savings bank reform has been comprehensive. He also said that he did not see any inflation in Germany.

RTTNews