Draghi says ECB could still cut rates despite the bank effectively saying the opposite

The ECB left all of its main interest rates as well as its quantitative easing programme unchanged on Thursday as expected. But the statement made by the ECB after those decisions removed the phrase "or lower" from commentary on the future direction of interest rates.

At a press conference after the ECB's decision, Draghi told reporters: "On the current expectation, I don't expect lower interest rates, but you ask me: 'In case things were to worsen are you ready to lower interest rates?' The answer is 'yes'."

The bank had changed a sentence in the first paragraph of its official update from:

"The Governing Council expects the key ECB interest rates to remain at their present or lower levels for an extended period of time,"

To:

"The Governing Council expects the key ECB interest rates to remain at their present levels for an extended period of time."

By excluding those two words, the statement seemed to rule out interest rates falling further into negative territory in the foreseeable future. Draghi's comments undermine the confidence in that belief.

Speaking in Tallinn, Estonia, on the bank's annual trip away from its headquarters in Frankfurt, Draghi said that the bank could still expand its QE programme, also known as the APP (asset purchase programme), despite a widespread belief in the markets that QE will be gradually reduced from the end of 2017 onwards.

"It is part of our reaction function. If things turn out less favourable then we are ready to expand our APP," he told reporters.

The ECB has already reduced the ceiling on monthly asset purchases from a peak of €80 billion per month to €60 billion per month.

Draghi presented said that the ECB's economists "foresee annual HICP inflation at 1.5% in 2017, 1.3% in 2018 and 1.6% in 2019."

Those estimates undershoot of the bank's inflation target — close to, but below 2% — and are one of the reasons why the ECB sees the need to keep asset purchase levels so high and rates so low.

"The economic expansion [seen in the eurozone so far in 2017] has yet to translate into stronger inflation dynamics," Draghi said during a set of prepared remarks.

"So far, measures of underlying inflation continue to remain subdued. Therefore, a very substantial degree of monetary accommodation is still needed for underlying inflation pressures to build up and support headline inflation in the medium term."

The ECB's conference also addressed issues surrounding Wednesday's sudden takeover of Banco Popular by fellow Spanish lender Santander as part of an ECB-backed plan to prevent Popular from collapsing.

Commenting on the ECB's decision to push through the sale overnight into Wednesday, ECB vice-president Vitor Constâncio said: "The reasons that triggered that decision were related to liquidity problems. There was a bank run. So it was not a matter of assessing the developments of the solvency as such, but the liquidity issues."

Popular was "about to be unable to settle its debts and liabilities," Constâncio added.