(Bloomberg) -- Consumer expectations for euro-zone inflation over the next year rose “noticeably” in September, highlighting why the European Central Bank plans to keep interest rates elevated for an extended period. 

Expectations for the next 12 months increased to 4% from 3.5%, while uncertainty about the outlook intensified, the ECB said Wednesday in its monthly survey. For three years ahead, however, they remained unchanged at 2.5%.

The poll was conducted after a summer during which inflation held above 5% in the 20-nation euro zone. It’s since plunged, with consumer prices rising by just 2.9% from a year ago in October — down from a peak of more than 10% and within sight of the 2% goal.

Despite being on pause after an unprecedented bout of rate hikes that began in July 2022, officials must remain “vigilant,” Bundesbank President Joachim Nagel said late Tuesday, citing economic uncertainty and the risk that inflation could still turn out higher than expected.

Latvia’s Martins Kazaks said Wednesday in a TV interview that rates can only be cut once the ECB is sure that price growth is headed back to the target. 

According to ECB chief economist Philip Lane, who also spoke on Latvian television, that could take a while. The current focus is to “settle in, to the hold the rate where it is,” he said. Officials will get one more survey on consumer inflation expectations before their next policy meeting in December. 

Turning to the prospects for Europe’s economy, the ECB’s poll showed consumers becoming more downbeat, expecting a 1.2% contraction for the next 12 months, compared with 0.8% previously. Data last week revealed that third-quarter output in the currency bloc unexpectedly shrank by 0.1%, leaving it at risk of a mild recession over the second half of 2023. 

The ECB’s consumer survey also showed:

  • Expectations for the unemployment rate in a year rose to 11.4% from 11.1%
  • Nominal incomes are seen growing by 1.2% over the next year, same as in August
  • Consumers expect the price of their home to grow 2.2% over the same period, down from 2.3%
  • Expectations for mortgage interest rates rose further to 5.4% from 5.2%

--With assistance from Barbara Sladkowska.

©2023 Bloomberg L.P.