June 5 (Reuters) - Following is the text of European Reserve bank President Christine Lagarde's declaration after the bank's policy meeting on Thursday:
Link to declaration on ECB site: https://www.ecb.europa.eu/press/press_conference/monetary-policy-statement/2025/html/ecb.is250605~f00a36ef2b.en.html
Good afternoon, the Vice-President and I welcome you to our interview.
The Governing Council today decided to reduce the 3 key ECB interest rates by 25 basis points. In particular, the choice to decrease the deposit facility rate - the rate through which we guide the monetary policy position - is based upon our upgraded evaluation of the inflation outlook, the dynamics of underlying inflation and the strength of financial policy transmission.
Inflation is currently at around our 2 percent medium-term target. In the baseline of the new Eurosystem staff forecasts, heading inflation is set to typical 2.0 percent in 2025, 1.6 per cent in 2026 and 2.0 percent in 2027. The downward revisions compared to the March forecasts, by 0.3 percentage points for both 2025 and 2026, generally reflect lower presumptions for energy costs and a stronger euro. Staff expect inflation omitting energy and food to average 2.4 per cent in 2025 and 1.9 percent in 2026 and 2027, broadly unchanged given that March.
Staff see real GDP development balancing 0.9 percent in 2025, 1.1 percent in 2026 and 1.3 per cent in 2027. The unrevised growth forecast for 2025 shows a stronger than expected very first quarter integrated with weaker potential customers for the remainder of the year. While the uncertainty surrounding trade policies is expected to weigh on service investment and exports, particularly in the short term, increasing government investment in defence and infrastructure will significantly support development over the medium term. Higher genuine incomes and a robust labour market will permit households to invest more. Together with more beneficial funding conditions, this must make the economy more resistant to worldwide shocks.
In the context of high unpredictability, staff likewise examined some of the mechanisms by which various trade policies might impact growth and inflation under some alternative illustrative situations. These circumstances will be released with the personnel forecasts on our website. Under this circumstance analysis, an additional escalation of trade tensions over the coming months would result in development and inflation being listed below the standard forecasts. By contrast, if trade stress were fixed with a benign outcome, growth and, to a lesser level, inflation would be greater than in the standard projections.
Most measures of underlying inflation recommend that inflation will settle at around our 2 per cent medium-term target on a continual basis. Wage development is still raised but continues to moderate visibly, and profits are partly buffering its effect on inflation. The issues that increased unpredictability and an unpredictable market action to the trade stress in April would have a tightening up effect on financing conditions have eased.
We are identified to ensure that inflation stabilises sustainably at our two per cent medium-term target. Especially in present conditions of extraordinary uncertainty, we will follow a data-dependent and meeting-by-meeting method to determining the appropriate monetary policy stance. Our interest rate decisions will be based on our assessment of the inflation outlook because of the inbound economic and monetary information, the dynamics of underlying inflation and the strength of monetary policy transmission. We are not pre-committing to a particular rate course.
The decisions taken today are set out in a press release offered on our site.
I will now outline in more detail how we see the economy and inflation establishing and will then describe our assessment of monetary and monetary conditions.
Economic activity
The economy grew by 0.3 per cent in the first quarter of 2025, according to Eurostat ´ s flash price quote. Unemployment, at 6.2 percent in April, is at its lowest level since the launch of the euro, and employment grew by 0.3 per cent in the first quarter of the year, according to the flash quote.
In line with the personnel forecasts, survey data point general to some weaker potential customers in the near term. While manufacturing has enhanced, partially since trade has actually been advanced in anticipation of greater tariffs, the more domestically oriented services sector is slowing. Higher tariffs and a stronger euro are anticipated to make it harder for firms to export. High unpredictability is anticipated to weigh on financial investment.
At the very same time, several factors are keeping the economy resilient and must support development over the medium term. A strong labour market, increasing real incomes, robust economic sector balance sheets and easier funding conditions, in part since of our past rate of interest cuts, need to all assist consumers and companies withstand the fallout from a volatile global environment. Recently revealed measures to step up defence and facilities financial investment must likewise strengthen growth.
In the present geopolitical environment, it is even more urgent for fiscal and structural policies to make the euro area economy more efficient, competitive and durable. The European Commission ´ s Competitiveness Compass provides a concrete roadmap for action, and its propositions, consisting of on simplification, should be quickly embraced. This includes completing the savings and investment union, following a clear and enthusiastic schedule. It is also essential to quickly develop the legislative structure to prepare the ground for the potential introduction of a digital euro. Governments need to make sure sustainable public financial resources in line with the EU ´ s financial governance framework, while prioritising important growth-enhancing structural reforms and strategic investment.
Inflation
Annual inflation declined to 1.9 percent in May, from 2.2 per cent in April, according to Eurostat ´ s flash quote. Energy cost inflation stayed at -3.6 percent. Food rate inflation increased to 3.3 percent, from 3.0 per cent the month in the past. Goods inflation was unchanged at 0.6 percent, while services inflation dropped to 3.2 per cent, from 4.0 percent in April. Services inflation had actually jumped in April mainly since rates for travel services around the Easter vacations increased by more than anticipated.
Most indicators of underlying inflation suggest that inflation will stabilise sustainably at our 2 percent medium-term target. Labour costs are gradually moderating, as suggested by incoming data on negotiated incomes and readily available nation data on settlement per worker. The ECB ´ s wage tracker points to a further easing of negotiated wage development in 2025, while the staff projections see wage growth falling to listed below 3 per cent in 2026 and 2027. While lower energy costs and a stronger euro are putting down pressure on inflation in the near term, inflation is anticipated to return to target in 2027.
Short-term consumer inflation expectations edged up in April, likely showing news about trade stress. But the majority of steps of longer-term inflation expectations continue to stand at around 2 percent, which supports the stabilisation of inflation around our target.
Risk evaluation
Risks to economic development remain tilted to the downside. A further escalation in international trade stress and associated unpredictabilities could reduce euro area growth by dampening exports and dragging down investment and consumption. A degeneration in monetary market sentiment could cause tighter financing conditions and higher threat hostility, and make firms and families less ready to invest and take in. Geopolitical tensions, such as Russia ´ s unjustified war against Ukraine and the awful dispute in the Middle East, remain a significant source of uncertainty. By contrast, if trade and geopolitical stress were resolved promptly, this could lift sentiment and spur activity. An additional boost in defence and infrastructure costs, together with productivity-enhancing reforms, would also include to growth.
The outlook for euro location inflation is more uncertain than typical, as a result of the unpredictable worldwide trade policy environment. Falling energy costs and a more powerful euro could put additional downward pressure on inflation. This could be reinforced if higher tariffs resulted in lower need for euro area exports and to nations with overcapacity rerouting their exports to the euro area. Trade tensions might lead to greater volatility and risk aversion in monetary markets, which would weigh on domestic demand and would consequently also lower inflation. By contrast, a fragmentation of international supply chains could raise inflation by pressing up import prices and contributing to capacity restrictions in the domestic economy. A boost in defence and infrastructure spending might also raise inflation over the medium term. Extreme weather events, and the unfolding environment crisis more broadly, could drive up food rates by more than anticipated.
Financial and monetary conditions
Risk-free rates of interest have stayed broadly the same considering that our last conference. Equity prices have actually increased, and corporate bond spreads have actually narrowed, in action to more positive news about international trade policies and the enhancement in global threat belief.
Our previous rates of interest cuts continue to make business borrowing more economical. The typical rates of interest on brand-new loans to firms declined to 3.8 percent in April, from 3.9 per cent in March. The expense of releasing market-based financial obligation was unchanged at 3.7 percent. Bank lending to firms continued to reinforce slowly, growing by a yearly rate of 2.6 per cent in April after 2.4 percent in March, while corporate bond issuance was controlled. The typical interest rate on brand-new mortgages remained at 3. 3 per cent in April, while development in mortgage financing increased to 1.9 percent.
In line with our financial policy technique, the Governing Council thoroughly examined the links in between financial policy and financial stability. While euro location banks stay durable, more comprehensive monetary stability risks remain raised, in particular owing to highly unsure and volatile worldwide trade policies. Macroprudential policy stays the very first line of defence versus the build-up of financial vulnerabilities, improving strength and preserving macroprudential space.
The Governing Council today decided to decrease the 3 key ECB rate of interest by 25 basis points. In specific, the decision to decrease the deposit center rate - the rate through which we guide the monetary policy position - is based on our upgraded assessment of the inflation outlook, the dynamics of underlying inflation and the strength of monetary policy transmission. We are identified to guarantee that inflation stabilises sustainably at our two percent medium-term target. Especially in existing conditions of remarkable unpredictability, we will follow a data-dependent and meeting-by-meeting method to identifying the proper monetary policy position. Our interest rate decisions will be based on our assessment of the inflation outlook due to the inbound financial and monetary information, the dynamics of underlying inflation and the strength of financial policy transmission. We are not pre-committing to a specific rate path.
In any case, we stand ready to adjust all of our instruments within our mandate to guarantee that inflation stabilises sustainably at our medium-term target and to maintain the smooth performance of financial policy transmission. (Compiled by Toby Chopra)
