June 5 (Reuters) - Following is the text of European Reserve bank President Christine Lagarde's statement after the bank's policy meeting on Thursday:

Link to declaration on ECB website: https://www.ecb.europa.eu/press/press_conference/monetary-policy-statement/2025/html/ecb.is250605~f00a36ef2b.en.html
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Good afternoon, the Vice-President and I invite you to our press conference.

The Governing Council today chose to reduce the three essential ECB rates of interest by 25 basis points. In particular, the choice to reduce the deposit facility rate - the rate through which we steer the monetary policy position - is based on our updated evaluation of the inflation outlook, the dynamics of underlying inflation and the strength of financial policy transmission.

Inflation is currently at around our two percent medium-term target. In the baseline of the new Eurosystem staff projections, headline inflation is set to typical 2.0 percent in 2025, 1.6 percent in 2026 and 2.0 per cent in 2027. The downward revisions compared to the March projections, by 0.3 percentage points for both 2025 and 2026, generally show lower assumptions for energy rates and a more powerful euro. Staff anticipate inflation leaving out energy and food to average 2.4 percent in 2025 and 1.9 per cent in 2026 and 2027, broadly the same considering 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 development forecast for 2025 reflects a stronger than expected first quarter integrated with weaker potential customers for the remainder of the year. While the unpredictability surrounding trade policies is anticipated to weigh on company financial investment and exports, specifically in the short term, increasing government financial investment in defence and facilities will increasingly support development over the medium term. Higher genuine earnings and a robust labour market will enable households to spend more. Together with more beneficial funding conditions, this should make the economy more durable to international shocks.

In the context of high uncertainty, personnel also examined some of the mechanisms by which various trade policies could affect development and inflation under some alternative illustrative scenarios. These scenarios will be published with the staff forecasts on our website. Under this circumstance analysis, an additional escalation of trade tensions over the coming months would lead to growth and inflation being listed below the baseline forecasts. By contrast, if trade stress were solved with a benign outcome, development and, to a lesser degree, inflation would be greater than in the standard projections.

Most procedures of underlying inflation recommend that inflation will settle at around our 2 percent medium-term target on a continual basis. Wage growth is still elevated however continues to moderate visibly, and earnings are partly buffering its influence on inflation. The concerns that increased unpredictability and an unstable market action to the trade tensions in April would have a tightening influence on funding conditions have eased.

We are identified to ensure that inflation stabilises sustainably at our two per cent medium-term target. Especially in current conditions of exceptional unpredictability, we will follow a data-dependent and meeting-by-meeting approach to identifying the proper monetary policy stance. Our interest rate choices will be based on our evaluation of the inflation outlook because of the inbound economic and financial data, the characteristics of and the strength of monetary policy transmission. We are not pre-committing to a specific 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 explain our assessment of financial and financial conditions.

Economic activity

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

In line with the staff projections, survey data point overall to some weaker potential customers in the near term. While manufacturing has actually enhanced, partly since trade has actually been advanced in anticipation of higher tariffs, the more domestically oriented services sector is slowing. Higher tariffs and a stronger euro are expected to make it harder for firms to export. High unpredictability is anticipated to weigh on financial investment.

At the same time, several aspects are keeping the economy resistant and must support development over the medium term. A strong labour market, increasing real incomes, robust economic sector balance sheets and much easier funding conditions, in part because of our past rate of interest cuts, ought to all help consumers and firms hold up against the fallout from an unstable international environment. Recently revealed steps to step up defence and facilities financial investment ought to also strengthen development.

In today geopolitical environment, it is much more immediate for financial and structural policies to make the euro area economy more productive, competitive and resilient. The European Commission ´ s Competitiveness Compass provides a concrete roadmap for action, and its propositions, consisting of on simplification, should be promptly embraced. This consists of completing the savings and investment union, following a clear and enthusiastic schedule. It is also essential to rapidly develop the legislative framework to prepare the ground for the potential introduction of a digital euro. Governments should guarantee sustainable public financial resources 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 percent in May, from 2.2 percent in April, according to Eurostat ´ s flash quote. Energy cost inflation remained at -3.6 percent. Food rate inflation increased to 3.3 per cent, from 3.0 percent the month in the past. Goods inflation was unchanged at 0.6 per cent, while services inflation dropped to 3.2 percent, from 4.0 percent in April. Services inflation had leapt in April mainly because costs for travel services around the Easter holidays went up by more than expected.

Most signs of underlying inflation suggest that inflation will stabilise sustainably at our two per cent medium-term target. Labour expenses are slowly moderating, as suggested by incoming information on worked out incomes and available nation information on compensation per employee. The ECB ´ s wage tracker points to a more easing of worked out wage development in 2025, while the staff forecasts see wage growth falling to listed below 3 percent in 2026 and 2027. While lower energy rates and a stronger euro are putting down pressure on inflation in the near term, inflation is expected to return to target in 2027.

Short-term consumer inflation expectations edged up in April, most likely reflecting news about trade tensions. But most steps of longer-term inflation expectations continue to stand at around 2 percent, which supports the stabilisation of inflation around our target.

Risk assessment

Risks to economic growth remain slanted to the downside. A further escalation in worldwide trade stress and associated unpredictabilities might lower euro area development by dampening exports and dragging down investment and usage. A wear and tear in financial market sentiment might lead to tighter financing conditions and greater risk aversion, and make firms and families less ready to invest and consume. Geopolitical tensions, such as Russia ´ s unjustified war versus Ukraine and the awful conflict in the Middle East, stay a significant source of uncertainty. By contrast, if trade and geopolitical tensions were fixed quickly, this might lift sentiment and spur activity. A more increase in defence and facilities costs, together with productivity-enhancing reforms, would likewise add to development.

The outlook for euro area inflation is more unsure than usual, as an outcome of the volatile international trade policy environment. Falling energy costs and a stronger euro could put further down pressure on inflation. This could be enhanced if greater tariffs led to lower demand for euro location exports and to nations with overcapacity rerouting their exports to the euro location. Trade tensions could result in greater volatility and danger hostility in financial markets, which would weigh on domestic need and would therefore likewise lower inflation. By contrast, a fragmentation of international supply chains might raise inflation by rising import rates and contributing to capacity restrictions in the domestic economy. An increase in defence and facilities costs could also raise inflation over the medium term. Extreme weather condition events, and the unfolding climate crisis more broadly, might drive up food costs by more than expected.

Financial and financial conditions

Risk-free interest rates have actually stayed broadly the same since our last conference. Equity rates have increased, and business bond spreads have actually narrowed, in reaction to more favorable news about worldwide trade policies and the improvement in global danger belief.

Our past interest rate cuts continue to make corporate borrowing more economical. The typical rates of interest on new loans to firms decreased to 3.8 per cent in April, from 3.9 percent in March. The cost of issuing market-based debt was unchanged at 3.7 percent. Bank providing to companies continued to reinforce gradually, growing by an annual rate of 2.6 per cent in April after 2.4 per cent in March, while business bond issuance was subdued. The typical interest rate on new mortgages stayed at 3. 3 per cent in April, while growth in mortgage financing increased to 1.9 percent.

In line with our monetary policy method, the Governing Council thoroughly assessed the links between financial policy and financial stability. While euro location banks stay durable, more comprehensive monetary stability dangers remain raised, in particular owing to extremely unpredictable and volatile international trade policies. Macroprudential policy stays the first line of defence against the build-up of financial vulnerabilities, boosting strength and protecting macroprudential space.

The Governing Council today decided to reduce the 3 crucial ECB interest rates by 25 basis points. In specific, the decision to reduce the deposit facility 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 determined to ensure that inflation stabilises sustainably at our two per cent medium-term target. Especially in existing conditions of extraordinary uncertainty, we will follow a data-dependent and meeting-by-meeting approach to identifying the proper financial policy stance. Our rate of interest choices will be based upon our evaluation of the inflation outlook due to the inbound financial and monetary data, the characteristics of underlying inflation and the strength of monetary policy transmission. We are not pre-committing to a specific rate path.

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