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The Central Bank of Nigeria rounded off its two-day Monetary Policy Committee (MPC) meeting today with a decision to reduce the Cash Reserve Requirement (CRR) from 31% to 25%. However, by a unanimous vote, the MPC voted to retain the Monetary Policy Rate at 13%.

The MPC meeting was held at a time of great concern over the state of the global economy. Weak global demand and a fall in commodity prices have put significant pressure on frontier and emerging markets.

“In the emerging markets and developing economies, expectations of low growth continued into the third quarter of 2015, with strong likelihood of moderate uptick in 2016,” the CBN said in its Communiqué’ of the MPC meeting of Monday and Tuesday.

Growth in China has slowed, a scandal at Volkswagen has led to a plunge in the shares of automakers across the globe. About a third of the value of Volkswagen’s shares has been wiped out in two days. The German automaker has been accused of programming 11 million of its diesel-engine vehicles to emit lower amounts of harmful emissions in official tests than when users drive them on the road.

The National Bureau of Statistics (NBS) recently stated that headline inflation for the month of August marginally increased to 9.3% year on year, from 9.2% in July. Coupled with a weak 2.35% real GDP growth in Q2 2015, analysts had believed that these events would shape the tenor of this month's MPC meeting.

Reacting to the today’s MPC decision, Razia Khan, Head of Africa Research at Standard Chartered said in an email to clients, “The strategy seems to be to keep controls in place until demand adjusts to meet available foreign-exchange supply. This is a contractionary growth stance. Demand for foreign exchange will only fall to the extent that the economy slows sufficiently.”

The Nigerian apex bank has put in place a number of capital controls to curb the volatility of the Naira which has lost 22% of its value since June 2014 when oil price began to precipitously fall from over one hundred dollars per barrel to the current price of around $48.  

Godwin Emefiele, Governor of the Central Bank of Nigeria, said Nigeria's economy is at risk of falling into recession next year if proactive steps are not taken to support key industries. Some of the growth industries the CBN recognized in its report are agriculture and micro, small and medium scale enterprises (MSME).

Manji Cheto, Vice President of Teneo Intelligence in London, told Bloomberg that the CBN Governor’s signaling of a recession is “a clear indication that the growth story has got to be a big focus going forward.”

The MPC conceded that the implementation of the Treasury Single Account (TSA) policy of the Federal Government which pools all government revenue in one single account for the effective and transparent management of public finance, as well as other macroeconomic factors "could aggravate liquidity conditions in banks and impair their financial intermediation role, thus affecting economic growth." The Committee agreed that actions must be taken to ease market liquidity conditions.

Insufficient liquidity in the market recently led to the decision by JPMorgan to remove Nigeria from its Government Bond Index-Emerging Market (GBI-EM). Experts say this decision has also triggered heavy outflows from Nigeria.

In other decisions, the MPC retained the symmetric corridor around the MPR at 200 basis points; the Liquidity Ratio was retained at 30%.

As the markets await a clear economic blueprint from the government of President Muhammadu Buhari, the MPC noted that "synergy between monetary and fiscal policies remained the most potent option to sustainable growth."