June 5 (Reuters) - Following is the text of European Central Bank President Christine Lagarde's statement after the bank's policy meeting on Thursday:
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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 invite you to our interview.

The Governing Council today decided to reduce the 3 crucial ECB rate of interest by 25 basis points. In particular, the decision to decrease the deposit facility rate - the rate through which we steer the monetary policy position - is based on our updated assessment of the inflation outlook, the characteristics 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 personnel forecasts, heading inflation is set to typical 2.0 per cent in 2025, 1.6 per cent in 2026 and 2.0 percent in 2027. The downward modifications compared with the March forecasts, by 0.3 percentage points for both 2025 and 2026, primarily show lower assumptions for energy rates and a stronger euro. Staff expect inflation omitting energy and food to typical 2.4 per cent in 2025 and 1.9 per cent in 2026 and 2027, broadly the same considering that March.

Staff see real GDP development averaging 0.9 per cent in 2025, 1.1 percent in 2026 and 1.3 percent in 2027. The unrevised growth forecast for 2025 reflects a stronger than anticipated first quarter combined with weaker prospects for the rest of the year. While the uncertainty surrounding trade policies is expected to weigh on business investment and exports, particularly in the short term, rising government investment in defence and infrastructure will progressively support growth over the medium term. Higher real incomes and a robust labour market will permit homes to invest more. Together with more beneficial funding conditions, this need to make the economy more resistant to global shocks.

In the context of high unpredictability, staff also examined some of the systems by which different trade policies could impact development and inflation under some alternative illustrative scenarios. These circumstances will be released with the personnel forecasts on our website. Under this scenario analysis, a more escalation of trade stress over the coming months would result in growth and inflation being listed below the baseline forecasts. By contrast, if trade stress were solved with a benign result, development and, to a lower extent, inflation would be greater than in the baseline projections.

Most measures of underlying inflation suggest that inflation will settle at around our two percent medium-term target on a sustained basis. Wage development is still elevated however continues to moderate visibly, and revenues are partly buffering its influence on inflation. The issues that increased unpredictability and a volatile market response to the trade stress in April would have a tightening effect on funding conditions have eased.

We are determined to guarantee that inflation stabilises sustainably at our 2 per cent medium-term target. Especially in current conditions of exceptional unpredictability, we will follow a data-dependent and meeting-by-meeting technique to identifying the proper monetary policy position. Our rate of interest choices will be based upon our evaluation of the inflation outlook in light of the inbound economic and financial information, the characteristics of underlying inflation and the strength of monetary policy transmission. We are not pre-committing to a particular rate course.

The choices taken today are set out in a press release available on our website.

I will now describe in more information how we see the economy and inflation developing and will then discuss our assessment of monetary and monetary conditions.

Economic activity

The economy grew by 0.3 per cent in the very first quarter of 2025, according to Eurostat ´ s flash quote. Unemployment, at 6.2 per cent in April, is at its lowest level because the launch of the euro, and employment grew by 0.3 per cent in the first quarter of the year, according to the flash estimate.

In line with the staff forecasts, study data point overall to some weaker potential customers in the near term. While production has actually reinforced, partially since trade has been brought forward in anticipation of higher tariffs, the more locally oriented services sector is slowing. Higher tariffs and a more powerful euro are anticipated to make it harder for firms to export. High uncertainty is anticipated to weigh on investment.

At the exact same time, a number of aspects are keeping the economy resistant and should support development over the medium term. A strong labour market, rising genuine incomes, robust economic sector balance sheets and easier funding conditions, in part due to the fact that of our past rates of interest cuts, ought to all help customers and firms endure the fallout from an unstable international environment. Recently revealed procedures to step up defence and facilities financial investment need to also boost development.

In the present geopolitical environment, it is even more urgent for fiscal and structural policies to make the euro location economy more productive, competitive and durable. The European Commission ´ s Competitiveness Compass offers a concrete roadmap for action, and its propositions, including on simplification, ought to be quickly adopted. This consists of completing the savings and financial investment union, following a clear and enthusiastic timetable. It is also crucial to rapidly develop the legal framework to prepare the ground for the prospective intro of a digital euro. Governments should make sure sustainable public finances in line with the EU ´ s economic governance framework, while prioritising important growth-enhancing structural reforms and strategic investment.

Inflation

Annual inflation decreased to 1.9 per cent in May, from 2.2 per cent in April, according to Eurostat ´ s flash estimate. Energy cost remained at -3.6 per cent. Food rate inflation rose to 3.3 percent, from 3.0 percent the month previously. Goods inflation was the same at 0.6 percent, while services inflation dropped to 3.2 percent, from 4.0 percent in April. Services inflation had jumped in April generally since rates for travel services around the Easter holidays increased by more than anticipated.

Most indications of underlying inflation suggest that inflation will stabilise sustainably at our two percent medium-term target. Labour expenses are gradually moderating, as shown by inbound information on negotiated salaries and available nation information on payment per employee. The ECB ´ s wage tracker indicate an additional easing of negotiated wage development in 2025, while the staff projections see wage development being up to listed below 3 percent in 2026 and 2027. While lower energy rates and a more powerful euro are putting down pressure on inflation in the near term, inflation is expected to go back to target in 2027.

Short-term consumer inflation expectations edged up in April, likely showing news about trade stress. But most procedures 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 growth stay slanted to the disadvantage. An additional escalation in worldwide trade tensions and associated uncertainties could reduce euro location growth by dampening exports and dragging down financial investment and usage. A deterioration in financial market belief could lead to tighter funding conditions and higher danger aversion, and confirm and homes less going to invest and consume. Geopolitical tensions, such as Russia ´ s unjustified war versus Ukraine and the awful conflict in the Middle East, remain a significant source of uncertainty. By contrast, if trade and geopolitical stress were fixed promptly, this might raise belief and spur activity. A more increase in defence and infrastructure costs, together with productivity-enhancing reforms, would also contribute to development.

The outlook for euro location inflation is more unsure than normal, as an outcome of the volatile international trade policy environment. Falling energy rates and a more powerful euro could put more down pressure on inflation. This might be strengthened if higher tariffs resulted in lower demand for euro location exports and to nations with overcapacity rerouting their exports to the euro area. Trade tensions might lead to greater volatility and danger hostility in monetary markets, which would weigh on domestic demand and would thereby likewise lower inflation. By contrast, a fragmentation of international supply chains might raise inflation by pressing up import costs and including to capacity restrictions in the domestic economy. A boost in defence and facilities spending could likewise raise inflation over the medium term. Extreme weather condition occasions, and the unfolding environment crisis more broadly, might increase food rates by more than expected.

Financial and financial conditions

Risk-free rates of interest have actually stayed broadly unchanged considering that our last conference. Equity costs have actually increased, and business bond spreads have actually narrowed, in reaction to more positive news about international trade policies and the improvement in international danger belief.

Our previous rates of interest cuts continue to make corporate borrowing less expensive. The average interest rate on new loans to firms decreased to 3.8 per cent in April, from 3.9 per cent in March. The expense of issuing market-based debt was unchanged at 3.7 per cent. Bank providing to firms continued to reinforce gradually, growing by an annual rate of 2.6 percent in April after 2.4 per cent in March, while corporate bond issuance was subdued. The typical rates of interest on new mortgages remained at 3. 3 per cent in April, while development in mortgage lending increased to 1.9 per cent.

In line with our monetary policy strategy, the Governing Council completely assessed the links in between financial policy and financial stability. While euro location banks remain resilient, more comprehensive monetary stability dangers remain raised, in specific owing to extremely unsure and volatile international trade policies. Macroprudential policy remains the very first line of defence versus the accumulation of monetary vulnerabilities, boosting durability and protecting macroprudential area.

The Governing Council today decided to reduce the three crucial ECB rates of interest by 25 basis points. In particular, the decision to reduce the deposit facility rate - the rate through which we guide the financial policy position - is based upon our upgraded evaluation of the inflation outlook, the dynamics of underlying inflation and the strength of financial policy transmission. We are figured out to make sure that inflation stabilises sustainably at our two percent medium-term target. Especially in present conditions of remarkable uncertainty, we will follow a data-dependent and meeting-by-meeting approach to identifying the appropriate monetary policy position. Our interest rate decisions will be based on our assessment of the inflation outlook in light of the inbound financial and financial data, the dynamics of underlying inflation and the strength of financial policy transmission. We are not pre-committing to a particular rate path.

In any case, we stand prepared to change all of our instruments within our mandate to ensure that inflation stabilises sustainably at our medium-term target and to preserve the smooth functioning of monetary policy transmission. (Compiled by Toby Chopra)
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