The naira slumped to its lowest ever on Monday, just before an emergency Central Bank of Nigeria (CBN) meeting where interest rates were hiked far further than analysts expected and several other tightening measures were imposed.

The naira initially recovered from the record low of 167.8 to the dollar as the CBN backed up its interventions by selling over $1 billion into the market in a week, traders said.

But trading on the local currency remains volatile with dealers not willing to quote actively. The naira ended the week at 164.05 in the interbank market, far weaker than at the central bank’s auction on Wednesday when the regulator sold $591.67 million at 150 naira to the dollar.

“My feeling is the naira is going to strengthen as measures kick-in,” Lamido Sanusi said.

“What you are seeing this week not is not the long-term trend.”

The CBN on Monday raised its benchmark interest rate by 275 basis points to 12 percent, upped the cash reserve requirement of banks to 8 percent from 4 percent and reduced net open positions lenders can hold as reserves to 1 percent of shareholders funds, from 5 percent.

These measures were intended to reduce the quantity of naira in the system and free up dollar supply.

It has also said it will not be allow petroleum dealers to source dollars at its official window for imports. Petrol importers have bought over $7 billion from the auction so far this year, depleting the nation’s reserve, central bank said.

“We haven’t yet seen the major impact of these measures yet. We will see these speculating oil marketers disappearing and then it will be genuine importers coming to the window ... we believe banks are long on dollars and holding cash ... we will see if they are sitting on cash,” Sanusi said.

CBN said on Friday it will limit forex sales at its auctions to foreign firms taking the currency offshore because they can buy from the interbank market, which will reduce the reliance on the CBN for foreign exchange supply.

“We have not introduced capital controls. We are simply saying if you are bringing in capital into the market then you can also take from the market. It should also be clear that the interbank market is larger than the WDAS (CBN auction), we are not pushing anyone into a narrow end,” Sanusi said.

“This is part of deepening reforms to the interbank market, so there is less dependence on the central bank and we can preserve (foreign exchange) reserves.”

By selling dollars at bi-weekly auctions Sanusi is dipping into the foreign exchange reserves, which are built up on crude oil sales. Despite high oil prices and production reserves have been declining. Foreign exchange reserves stood at $32.94 billion on Oct. 13, down from 35.24 billion a year earlier.

CBN has been trying to save the local currency from depreciating by maintaining it within a band of +/-3 percent around 150 naira to the dollar but analysts say the options left for the regulator may be limited given falling reserves and weak oil prices.

Under pressure to keep up with rising dollar demand, CBN breached its own rule earlier this month by selling outside the 145.5-154.5 naira/dollar band at a series of auctions, creating uncertainty about the value of the naira at the interbank market.

Some dealers say more realistic action would be to move its band to around 160 naira, an effective devaluation of the unit, which the CBN has said it wants to avoid.

“In a normal world there is no reason why the naira shouldn’t trade in that bank (+/- 3 percent around 150/dollar) by the time all the measures we have put in work their way through the system but the key for us is stability,” Sanusi said.

“Let’s wait and see what equilibrium the naira finds.”

CBN monetary tightening this week is an extension of a trend for more than a year, the interest rate hike on Monday was the sixth in 2011 in a continued effort to curb inflation, in addition to supporting the naira.

Nigeria’s consumer inflation rose to 10.3 percent year-on-year in September from 9.3 percent in August, snapping three straight months of declines, the National Bureau of Statistics (NBS) said.

This is the first time in three months inflation has risen outside the CBN’s notional single-digit target but Sanusi said that the regulator had been anticipating price pressures.

“This (higher inflation) is not entirely a surprise. We have always said continued tightening has been necessary because of pressures on inflation.”

Nigeria’s government unveiled a four-year fiscal plan this month, which showed spending in the 2012 budget will increase from this year, although the fiscal deficit should decline.

It also announced the forthcoming removal of fuel subsidies, which the government said cost the country 1.2 trillion naira ($7.5 billion) this year.

“I don’t think fuel deregulation is going to have the huge impact on inflation some expect. Fiscal spending and import inflation will be more important for inflation.”