Summary
Highlights
President Lagarde announces the ECB Governing Council's decision to lower the three key ECB interest rates by 25 basis points. This move is based on an updated assessment of the inflation outlook, underlying inflation dynamics, and monetary policy transmission. Headline inflation is projected to average 2% in 2025, 1.6% in 2026, and 2% in 2027. Downward revisions for 2025 and 2026 reflect lower energy prices and a stronger euro. Real GDP growth is expected to average 0.9% in 2025, 1.1% in 2026, and 1.3% in 2027, with the unrevised 2025 projection reflecting a stronger Q1 offset by weaker prospects for the rest of the year.
The Euro area economy shows resilience due to a strong labor market, rising real incomes, robust private sector balance sheets, and easier financing conditions. Government investment in defense and infrastructure is expected to support growth. Lagarde emphasizes the urgency for fiscal and structural policies to enhance productivity and competitiveness, including completing the savings and investment union and establishing a legislative framework for a digital euro. Governments are urged to ensure sustainable public finances while prioritizing growth-enhancing reforms.
Annual inflation declined to 1.9% in May. Services inflation dropped to 3.2% from 4% in April, while food price inflation rose slightly. Most indicators suggest underlying inflation will stabilize around the 2% medium-term target. Wage growth is moderating, and staff projections indicate it will fall below 3% in 2026 and 2027. While lower energy prices and a stronger euro put downward pressure on near-term inflation, it is expected to return to target in 2027. Longer-term inflation expectations remain anchored around 2%.
Risks to economic growth are tilted to the downside, primarily due to escalating global trade tensions, which could dampen exports, investment, and consumption. Geopolitical tensions and a deterioration in financial market sentiment also pose risks. Conversely, a resolution of trade and geopolitical tensions could boost activity. Inflation outlook remains uncertain, with potential downward pressure from falling energy prices and a stronger euro, or upward pressure from global supply chain fragmentation and increased defense spending.
Risk-free interest rates have remained stable, while equity prices have risen and corporate bond spreads narrowed due to improved global risk sentiment. Past interest rate cuts have made corporate borrowing less expensive, with the average interest rate on new loans to firms declining to 3.8%. Bank lending to firms strengthened, and mortgage lending increased. The governing council continues to assess the links between monetary policy and financial stability, noting that macroprudential policy is the first line of defense against financial vulnerabilities.
The decision to cut interest rates by 25 basis points was almost unanimous, with only one dissenting member. Lagarde emphasizes that the ECB is in a good position to navigate uncertain conditions. The ECB will maintain a data-dependent and meeting-by-meeting approach, without pre-committing to a particular rate path. Their decisions will be based on assessments of the inflation outlook, underlying inflation dynamics, and monetary policy transmission, ensuring inflation stabilizes at the 2% medium-term target.
Lagarde confirms the ECB's confidence in the economy, noting unchanged growth numbers and a reinforced Q1 performance. While acknowledging uncertainties like trade tensions and retaliation, she believes the ECB is well-positioned. The path of inflation continues to trend towards 2% by 2027, with temporary dips in 2026 attributed to energy prices and the euro's value. The ECB is prepared to assess incoming data meeting by meeting.
Lagarde clarifies that the concept of a 'neutral rate' was not discussed. She notes that the economy is still dealing with external shocks, such as the pandemic and the war in Ukraine. Despite these, inflation is currently at the target of 2%, and expectations are well-anchored. Key inflation drivers, such as services inflation, wages, and profits, are aligning with projections. Significant uncertainties, particularly concerning supply chain disruptions, remain a challenge.
Lagarde congratulates Bulgaria, noting the strong likelihood of it becoming the 21st Eurozone member, despite the European Council's final approval pending. She expresses delight at the expansion and anticipates Bulgaria's contributions. She highlights the increasing appreciation for the Euro among Europeans, with 83% valuing it as their currency, and hopes Bulgarians will likewise appreciate its stability and protective role.
Lagarde states that the current rate cut signifies nearing the end of a monetary policy cycle that responded to compounded shocks. However, she stresses that a new era brings different challenges and policies. The ECB remains committed to its 2% medium-term target for inflation, adjusting as needed with close navigation around the target.
Lagarde clarifies that the 'direction of travel' concept was relevant when the target was distant; now, with inflation within sight of the target, the focus is on sustained delivery. On the euro's role, she aligns with Governor Panetta's view that an opportunity exists to strengthen its international and reserve currency status. This requires substantive decisions from member states and EU institutions to consolidate Europe's economic and geopolitical role, streamline capital markets, and ensure legal certainty for investors.
Lagarde reiterates the inflation forecast: 2% in 2025, 1.6% in 2026, and 2% in 2027. Core inflation is even more stable. The 1.6% projection for 2026 is at the low end of forecasts, influenced by energy prices and the euro's value. Vice President Dindos addresses the BBVA-Sabadell merger, indicating that while the ECB has given its green light, the Spanish government's definitive opinion is awaited, and speculation is premature.
Lagarde asserts that the Euro area is strong enough to handle a strong euro. She points to a solid labor market with record low unemployment, the avoidance of a forecasted recession, and positive growth projections. Wage increases are decelerating in line with the 2% inflation target. Monetary policy is transmitting smoothly, with credit and interest rates responding well. She notes a significant momentum for improvement and simplification in Europe, attracting capital and boosting confidence among investors.