×

Error if ECB started tapering its bond-buying program: Analyst

The European Central Bank (ECB) is coming close to the scheduled end of its quantitative easing programme in March 2017 and investors are already second-guessing whether the bank will extend the program or start to roll back.

But one analyst told CNBC Wednesday that the ECB could be making a "policy error" if they tapered.

"If they start tapering now, against the weak fundamentals and the banking system that is still quite fragile, it could be a policy error," Mouhammed Choukeir, Chief Investment Officer, Kleinwort Benson said.

Earlier this month, Europe saw its own version of "taper tantrum" after a report said policymakers at the ECB were looking at winding back its trillion-dollar program.

Bloomberg cited officials at the euro zone's central bank saying that the 80 billion euro-a-month program could be tapered in steps of 10 billion euros before the official conclusion of its quantitative easing. Although, it heavily caveated that view with suggestions it could still be extended past the current end-date of March 2017. However, a spokesperson for the ECB later said that the Governing Council "has not discussed these topics", which President Mario Draghi has previously iterated.

Some analysts have said that the ECB will be compelled to extend its bond-buying due to the weakness and uncertainty in the euro zone economy.

"We expect the ECB to announce a six-month extension to the QE programme at the December meeting (in line with consensus estimates) and change the modalities of the QE programme by year-end," UBS Global Research said in their note.

The note further explained that an extension to the QE programme that is less than 6 months would be seen as a hawkish outcome resulting in a steeper curve and higher yields.

"Meanwhile a nine-month extension or longer would lead to a flatter curve unless a significant change in the modality of the QE programme is made," the note said.

However, analysts have warned that an extension of QE programme will add further pressure on European bank profitability that arecurrently already bearing the brunt of negative interest rates.

"Poor profitability, lackluster loan growth and uncertain capital rules threaten the effectiveness of the euro zone monetary transmission mechanism, forcing deposit rates lower and credit costs higher. We remain cautious on the outlook for European bank profitability, with our views detailed within," the UBS report said.

European banks have seen their stocks fall to all-time lows due to a number of factors such as uncertainty surrounding the U.K.'s vote to leave the European Union, weak earnings reports and low interest rate across the globe.

"European banks face three long-term headwinds that have impacted their performance over a period of time. These include the Banking Resolution and Recovery Directive, negative interest rates and non-performing loans," Dhaval Joshi, senior vice-president at BCA Research told CNBC via email earlier this week.


Follow CNBC International on Twitter and Facebook.