The Central Bank of Nigeria (CBN), which has kept its policy rate steady since October 2011, also said high domestic liquidity could exert pressure on both the exchange rate and consumer prices, accentuating the already high demand for foreign exchange, further depleting external reserves.
In a statement from Acting Governor Sarah Alade, who will be handing the reins of the CBN to Godwin Emefiele next month, the bank's monetary policy committee voice concern over the eroded fiscal buffers that have exposed the Nigerian economy to domestic and external shocks, accentuating the regime of persistently high interest rates, elevated demand for foreign exchange and declining accretion of reserves.
"The Committee enjoined the management of the bank to continue to monitor developments in the fiscal space with a view to taking appropriate monetary policy actions," the bank said.
Nigeria's headline inflation rate rose slightly to 7.0 percent in April from 7.8 percent, within the central bank's 6.0 - 9.0 percent target range. Core inflation, which had eased to 6.6 percent in January, rose further to 7.5 percent in April after 7.2 percent in February.
Nigeria's gross official reserves declined to US$ 38.3 billion as of May 15 - the equivalent of some 9 months of imports - from $37.4 billion end-March and $42.85 billion end-December.
However, the central bank also said it was satisfied with the overall domestic economic environment, with stable inflation, recent stability in the foreign exchange rate of the naira currency, stable interbank rates and a strong growth outlook.
"Over the medium term, the major risks to price stability appeared to be emanating from both external and internal sources," the bank said.
The external risks to Nigeria's economy stem from higher yields and interest rates in the U.S. and rather low economic activity in emerging markets, both of which could have repercussions for foreign exchange inflows and stability of the exchange rates.
Internal risks include high systemic banking system liquidity, elevated security concerns and expected high election-related spending in the run-up to the 2015 general elections.
The naira has been depreciating steadily against the U.S. dollar since 2009 and fell in February when the country's president suspended the central bank's internationally-respected governor, Lamido Sanusi.
But the currency started to appreciate in March, helped by the central bank's tightening when its raised the cash reserve requirement on private sector deposits by 300 basis points to 15.0 percent.
Since March 1, the naira has gained 2.1 percent, quoted at 162.34 to the U.S. dollar today, but it is still down 1.5 percent since the start of the year.