In a bombshell remark, Robert Holzmann, a member of the European Central Bank's Governing Council, hinted that the ECB might hold off on widely anticipated interest rate cuts in 2024.

Addressing speculation about a potential cut in April at the World Economic Forum, Holzmann said, “Everything we have seen in recent weeks points in the opposite direction, so I may even foresee no cut at all this year.”

He added, “I’m afraid, leaving Davos, those people will be deeply disappointed.”

Inflation risks are still too high

Holzmann pointed to a couple of the underlying reasons for his belief that interest rate cuts may be premature.

For one, headline inflation in the Eurozone surged to 2.9% last month on the back of rising energy prices—up from 2.4% the previous month. That’s still a far cry from the ECB target of 2%.

“Unless we see a clear decline towards 2%, we won’t be able to make any announcement at all when we’re going to cut,” he said.

Holzmann also touched on geopolitical tensions in the Middle East— particularly the Israel-Hamas conflict involving Lebanon’s Hezbollah and Yemen’s Houthis—as well as other geopolitical risks.

He suggested that these disputes may only be the beginning of a major conflict, which could lead to yet another energy crisis and even stagflation next year.

Monetary normalization is key

As one of the most hawkish ECB members, Holzmann reiterated the ECB’s commitment to addressing high debt levels and normalizing monetary policy after Covid.

Even though the central bank held its rates steady in its final 2023 meeting on Dec 14, policymakers settled on a timeline to shrink its balance sheet as part of its “monetary normalization.”

The ECB plans to sell off nearly $50 billion worth of assets by the end of 2024 and discontinue all reinvestments under the Pandemic Emergency Purchase Program (PEPP).

The PEPP, which was introduced during Covid, is the ECB’s largest asset purchase program and has added nearly $2 trillion worth of assets to the central bank’s portfolio.

The ECB halted purchases under the PEPP program at the end of 2021 and has since been reinvesting all maturing principal payments. That may change very soon.

According to last month’s ECB statement, the central bank will offload more than $8 billion worth of PEPP assets per month beginning in the second half of 2024 and will stop all reinvestments toward the end of the year.

“Over the second half of the year, [the ECB] intends to reduce the PEPP portfolio by €7.5 billion per month on average. The Governing Council intends to discontinue reinvestments under the PEPP at the end of 2024,” stated the post-meeting ECB press release.