ECB Vice President Luis De Guindos said in an interview that by holding interest rates steady "at their current level", ECB anticipates a significant impact on taming inflation to target of 2%.

This comes as a positive sign for the markets that have seen inflation rates soar over the past year, with a peak above 10% that has since eased to 2.9%. With core inflation also showing signs of moderation, ECB’s tightening campaign seems to be bearing fruit.

However, de Guindos emphasized a "prudent and cautious" approach because of "risks around the outlook for inflation over the next few months." This underlies ECB’s stance to consider interest rate decisions on a "meeting-by-meeting" basis, guided by unfolding economic data.

De Guindos also pointed out that "leading indicators point to the growth outlook being somewhat more negative than we previously projected." Nonetheless, he believes that inflation may align closely with their September projections.

Full interview of ECB de Guindos here.

Bundesbank President Joachim Nagel likened the journey toward ECB’s inflation target to an arduous “last mile,” which “may well be the hardest”.

Nagel pointed out that a key strategy for businesses would involve absorbing recent wage hikes—a move that will necessitate accepting slimmer profit margins.

On the other side, he emphasized the necessity of a more restrained fiscal approach from governments.

While wage increases are anticipated to exert some pressure on pricing, Nagel reassured that currently, there’s no sign of a “self-reinforcing spiral” in wage-price dynamics. This suggests a cautious optimism that, while the path forward is steep, runaway inflation is not an imminent threat.

ECB Chief Economist Philip Lane indicated that although there is “some progress” in mitigating underlying inflationary, he is not fully convinced of the sufficiency of these efforts to date.

“This is why we are in this period now of holding interest rates at a significantly high level until this process makes further progress,” Lane explained,

Lane also conveyed his reservations about the steep decline in headline inflation numbers, attributing the fall primarily to the base effect from last year’s energy price surges.

Looking ahead, Lane projected that the descent in inflation rates might pause, with inflation likely hovering in the “high twos or low threes” range in 2024.

He anticipates that a reversion to the ECB’s desired 2% inflation target would not materialize until 2025, suggesting a prolonged journey ahead for the central bank in its fight against persistent inflation.

ECB’s latest Consumer Expectations Survey has provided a snapshot of the current economic mood, characterized a heightened anticipation of inflation pressures in the near term juxtaposed with a more pessimistic outlook on economic growth.

The survey results for September show a discernible uptick in median consumer inflation expectations for the coming year, escalating from 3.5% to 4.0%. However, that consumers’ median inflation expectations over a three-year horizon held steady at 2.5%.

Contrastingly, the survey indicates no change in the mean expectations for nominal income growth, which remains anchored at 1.2%. This static view on income growth, coupled with the slight increase in anticipated nominal spending growth from 3.3% to 3.4%, hints at a potential squeeze on real consumer spending power.

The more negative tilt in expectations for economic growth, which have slipped from -0.8% to -1.2%, reflects an escalating concern over the economic direction. Furthermore, the anticipated unemployment rate has edged up from 11.1% to 11.4% for the coming year.

Full ECB Consumer Expectations Survey here.