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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 statement 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 three essential ECB interest rates 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 on our updated assessment of the inflation outlook, the dynamics of underlying inflation and the strength of financial policy transmission.

Inflation is currently at around our two per cent medium-term target. In the baseline of the brand-new Eurosystem personnel forecasts, headline inflation is set to average 2.0 percent in 2025, 1.6 percent in 2026 and 2.0 per cent in 2027. The downward revisions compared with the March projections, by 0.3 percentage points for both 2025 and 2026, generally reflect lower assumptions for energy costs and a stronger euro. Staff expect inflation leaving out energy and food to typical 2.4 per cent in 2025 and 1.9 percent in 2026 and 2027, broadly the same given that March.

Staff see genuine GDP development balancing 0.9 per cent in 2025, 1.1 per cent in 2026 and 1.3 per cent in 2027. The unrevised growth forecast for 2025 shows a stronger than anticipated very first quarter combined with weaker potential customers for the remainder of the year. While the unpredictability surrounding trade policies is anticipated to weigh on service financial investment and exports, especially in the short-term, increasing federal government investment in defence and infrastructure will progressively support development over the medium term. Higher real incomes and a robust labour market will allow households to spend more. Together with more beneficial financing conditions, this should make the economy more durable to global shocks.

In the context of high unpredictability, personnel likewise assessed a few of the mechanisms by which different trade policies might impact development and inflation under some alternative illustrative situations. These will be released with the personnel projections on our site. Under this situation analysis, an additional escalation of trade tensions over the coming months would result in growth and inflation being below the baseline forecasts. By contrast, if trade stress were fixed with a benign result, growth and, to a lesser level, inflation would be higher than in the standard projections.
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Most measures of underlying inflation suggest that inflation will settle at around our two per cent medium-term target on a sustained basis. Wage growth is still raised however continues to moderate noticeably, and profits are partially buffering its effect on inflation. The concerns that increased unpredictability and an unstable market action to the trade stress in April would have a tightening influence on funding conditions have actually eased.

We are figured out to make sure that inflation stabilises sustainably at our 2 percent medium-term target. Especially in current conditions of extraordinary uncertainty, we will follow a data-dependent and meeting-by-meeting approach to figuring out the suitable financial policy stance. Our rates of interest decisions will be based upon our evaluation of the inflation outlook due to the incoming economic and financial information, the dynamics of underlying inflation and the strength of financial policy transmission. We are not pre-committing to a particular rate path.

The choices taken today are set out in a news release available on our site.

I will now describe in more detail how we see the economy and inflation establishing and will then discuss our assessment of financial 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 estimate. Unemployment, at 6.2 per cent in April, is at its most affordable level since the launch of the euro, and work grew by 0.3 percent in the very first quarter of the year, according to the flash estimate.

In line with the personnel projections, study data point total to some weaker prospects in the near term. While production has strengthened, partially due to the fact that trade has been advanced in anticipation of higher tariffs, the more locally oriented services sector is slowing. Higher tariffs and a stronger euro are expected to make it harder for firms to export. High uncertainty is anticipated to weigh on investment.

At the exact same time, several aspects are keeping the economy resistant and needs to support growth over the medium term. A strong labour market, rising real earnings, robust personal sector balance sheets and easier funding conditions, in part due to the fact that of our past rates of interest cuts, ought to all assist customers and firms endure the fallout from an unstable international environment. Recently revealed steps to step up defence and facilities investment ought to also boost development.

In the present geopolitical environment, it is much more immediate for financial and structural policies to make the euro location economy more productive, competitive and resilient. The European Commission ´ s Competitiveness Compass supplies a concrete roadmap for action, and its proposals, including on simplification, ought to be quickly adopted. This includes finishing the savings and investment union, following a clear and ambitious schedule. It is also essential to quickly establish the legislative framework to prepare the ground for the potential introduction of a digital euro. Governments need to ensure sustainable public financial resources in line with the EU ´ s economic governance structure, while prioritising essential growth-enhancing structural reforms and tactical financial investment.

Inflation

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

Most indicators of underlying inflation recommend that inflation will stabilise sustainably at our two per cent medium-term target. Labour expenses are slowly moderating, as suggested by inbound data on negotiated wages and available nation information on settlement per employee. The ECB ´ s wage tracker points to a further easing of worked out wage development in 2025, while the personnel projections see wage growth falling to 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 anticipated to go back to target in 2027.

Short-term customer inflation expectations edged up in April, likely reflecting news about trade stress. But the majority of measures of longer-term inflation expectations continue to stand at around 2 per cent, which supports the stabilisation of inflation around our target.

Risk assessment

Risks to economic development stay tilted to the disadvantage. A further escalation in worldwide trade tensions and associated unpredictabilities might reduce euro location development by dampening exports and dragging down investment and intake. A wear and tear in monetary market belief could result in tighter financing conditions and higher danger aversion, and confirm and households less happy to invest and take in. Geopolitical stress, such as Russia ´ s unjustified war versus Ukraine and the terrible conflict in the Middle East, remain a major source of uncertainty. By contrast, if trade and geopolitical stress were solved swiftly, this could raise belief and spur activity. A further boost in defence and infrastructure costs, together with productivity-enhancing reforms, would likewise contribute to growth.

The outlook for euro area inflation is more unpredictable than typical, as an outcome of the unstable international trade policy environment. Falling energy prices and a more powerful euro could put more downward pressure on inflation. This might be strengthened if higher tariffs led to lower need for euro location exports and to countries with overcapacity rerouting their exports to the euro location. Trade stress could result in higher volatility and threat aversion in financial markets, which would weigh on domestic need and would therefore likewise lower inflation. By contrast, a fragmentation of global supply chains might raise inflation by pressing up import rates and contributing to capability restrictions in the domestic economy. A boost in defence and infrastructure costs might likewise raise inflation over the medium term. Extreme weather occasions, and the unfolding climate crisis more broadly, could drive up food rates by more than anticipated.

Financial and monetary conditions

Risk-free rates of interest have actually stayed broadly unchanged since our last conference. Equity prices have risen, and corporate bond spreads have narrowed, in reaction to more favorable news about international trade policies and the improvement in worldwide danger sentiment.

Our past rates of interest cuts continue to make business loaning less expensive. The average rate of interest on new loans to firms declined to 3.8 per cent in April, from 3.9 percent in March. The cost of releasing market-based debt was the same at 3.7 percent. Bank lending 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 corporate bond issuance was suppressed. The typical rates of interest on new mortgages remained at 3. 3 per cent in April, while growth in mortgage lending increased to 1.9 per cent.

In line with our financial policy strategy, the Governing Council thoroughly examined the links between monetary policy and financial stability. While euro location banks remain resistant, more comprehensive financial stability dangers stay raised, in particular owing to highly unsure and unpredictable international trade policies. Macroprudential policy stays the very first line of defence versus the build-up of monetary vulnerabilities, boosting resilience and maintaining macroprudential space.

The Governing Council today decided to lower the three crucial ECB rate of interest by 25 basis points. In specific, the choice to lower the deposit center 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. We are determined to make sure that inflation stabilises sustainably at our 2 per cent medium-term target. Especially in existing conditions of remarkable unpredictability, we will follow a data-dependent and meeting-by-meeting method to figuring out the proper monetary policy position. Our rates of interest decisions will be based on our assessment of the inflation outlook in light of the incoming financial and financial data, the dynamics of underlying inflation and the strength of financial policy transmission. We are not pre-committing to a specific rate course.

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