The Central Bank Monetary Policy Committee (MPC) on Tuesday last week reduced the Monetary Policy Rate (MPR) from 13 percent to 11 percent; in a move that surprised analysts.

The MPC also cut the cash reserve requirement for banks from 25 percent to 20 percent. The committee voted 8 to 10 to reduce the MPR and 7 to 10 to reduce CRR with the hope that these twin cuts will stimulate the economy and help the country avoid a further slide in GDP.

Analyst were unimpressed, stating that the CBN has clearly demonstrated that its monetary policy actions are not pro-active and the MPC decision to reduce key rates and allow more funds in the banking system does not mean that banks will lend more to the critical sectors of the economy so as to stimulate investment and boost employment.

“With its accommodative monetary policy easing of MPR from 13percent to 11percent, the MPC has placed more emphasis on sluggish economic growth and high unemployment with less concern for price stability and external current account,” Temitope Oshikoya, chief executive officer, Nextnomics Advisory.

“The CBN is also placing more emphasis on helping the Federal Government with an aggressive internal borrowing plan to finance the 2016 fiscal budget deficits at lower rates instead of relying on external portfolio inflows,” Oshikoya said.

An additional N300bn to N350bn that would be released to the banking sector would create inflationary pressure and cause the naira to depreciate further at the parallel market, analyst said.

Lower interest rates may add to pressure on inflation, which slowed for the first time in almost a year in October to 9.3 percent which is still above the CBN range of 6 to 9 percent.

“CBN policy will cause external imbalance and put tremendous pressure on the naira,” Biscmark Rewane, chief executive officer, FDC told CNBC Africa.

A day after the decision of the MPC to cut rates aimed at stimulating lending in the economy, naira and bond yields fell sharply while stock rose, traders said.

The rate cut also weakened the naira on the unofficial market, which fell 0.8 percent to 242 to the dollar. The currency is pegged at 197 naira on the official market.

According to analysts, by cutting MPR and CRR simultaneously the CBN is also providing the government an opportunity to borrow at cheaper and more affordable rates.

“The CBN is placing more emphasis on helping the Federal Government with an aggressive internal borrowing plan to finance the 2016 fiscal budget deficits at lower rates instead of relying on external portfolio inflows,” Oshikoya said.

“Borrowing cost by the Federal Government should fall by close to half with the adoption of the new asymmetric corridor around MPR of +2/-7 percent,” he adds.

Weak fundamentals

The apex bank governor, Godwind Emefiele, cited weak fundamentals of the economy, particularly the low output growth, rising unemployment and the uncertainty of the global economic environment as its reason for reducing interest rates.

At the last meeting, we said that we had attained the end of tightening and that there was a need for the central bank of Nigeria to be seen to play its own role to put in place policies and regulations that will stimulate growth and development in the country,” Emefiele, said.

Nigeria’s economy where growth had averaged 8 percent per annum between 1999 and 2013 recorded GDP growth of 3.96 percent in the first quarter (Q1) of 2015 and 2.35 percent in the second quarter of Q2. In Q3, Nigeria GDP had grown by just 2.8 percent, according to the National Bureau of Statistics (NBS)

Oil, from which the Nigerian government earns 70 percent of budget revenues, tumbled to about a year low of $46per barrel (Pb) as at the time of writing.

The global economy is also struggling with slowing growth and threat of a recession. Japan has already entered yet another recession and China is struggling.

The US FED is also expected to raise rates in December; a move many believe will suck out more money from emerging markets including Nigeria. The world is also littered with conflicts, war and terrorism that threaten economic peace and stability. Commodity prices including Oil are also likely to remain bearish

The National Bureau of Statistics also reported that unemployment rate in Nigeria had risen to about 9.9 percent in Q3, 2015 with 7.5 million people currently out of jobs. With the GDP remaining stubbornly low, it is unlikely that private sector will expect to create jobs at a pace that should help stimulate the economy.

According to analyst, additional increase in unemployment implies that consumers will have fewer disposable incomes which in turns affect businesses who rely on sale of products and services to individuals to survive.

The CBN believes channeling funds to employment generating sectors- agriculture, infrastructural development and solid minerals.