ABUJA - Nigeria's central bank will tighten policy over the next two quarters to manage inflation while directing banks to boost capital to support an expansion of the economy, its new governor, Olayemi Cardoso, said on Friday.

Cardoso, who took over in September, faces immediate pressure to curb excess liquidity in the banking system and tackle inflation, which has risen for 10 consecutive months, reaching 27.33% in October, the highest in about 18 years.

Outlining his policy thrust, Cardoso told bankers the Central Bank of Nigeria (CBN) would stop direct fiscal interventions that have blurred the lines between monetary and fiscal policy and undermined its ability to manage inflation, discontinuing the much-criticised unorthodox policies pursued by his predecessor, Godwin Emefiele.

The CBN has "approved the adoption of an explicit inflation-targeting framework to enhance the effectiveness of our monetary policy... Details and requirements for this framework are currently being finalised along with the fiscal authorities," he said in the commercial hub of Lagos.

Cardoso said the west African nation's economy could grow to $1 trillion over the next seven years and that lenders required extra capital to play in a bigger economy.

Nigeria's $240 billion economy recorded third-quarter growth of 2.5% on Friday, barely changed from the previous quarter, as its loss-making dominant oil sector contracted at a much slower pace while government reforms were yet to take effect.

Africa's largest economy could grow by 3.9% in the fourth quarter, Cardoso said.

"The Central Bank of Nigeria is fully committed to ensuring price stability and financial system stability," he said. "We will tackle institutional deficiencies, restore corporate governance, strengthen regulations and implement prudent policies.

Cardoso pledged to focus on rebuilding trust at the regulator, manage liquidity to curb inflation, bring down high interest rates and stabilise the exchange rate.

"We are taking measured and deliberate steps to send the right signals to markets," he said, assuring investors that the economy will "experience significant stability in the short to medium term as we recalibrate our policy toolkit and implement far-reaching measures."

President Bola Tinubu has embarked on Nigeria's boldest reforms in decades by scrapping a popular but costly subsidy on petrol and a system of multiple exchange rates which had kept the currency artificially strong, curbed trade and growth.

Cardoso said reforms, which have worsened hardship for the population, will contribute to a stable exchange rate and improve macroeconomic stability.

The CBN has raised interest rates more than 700 basis points since last year to fight inflation. Cardoso said month-on-month inflation had started to fall and that his team had worked on measures to ensure rates feed through to the economy.

On Nov. 2, the central bank began settling overdue currency forwards, estimated at about $7 billion, which corporates bought from local lenders. Banks then repaid foreign credit lines with their own funds when the central bank did not pay out.

At least 31 banks were paid in the first tranche of settlements, Cardoso said, in a bid to relieve pressure on the naira, which has been in free fall on the unofficial parallel market.

"These payments will continue until obligations are cleared," he said.

The governor said he would allow market forces to determine exchange rates as the CBN aims to set clear, transparent and harmonised rules governing market operations.

"New foreign exchange guidelines will be developed and extensive consultations will be done with banks and FX operators before implementing any new requirements," Cardoso said.

($1 = 839.54 naira)

(Reporting by Chijioke Ohuocha and Elisha Bala-Gbogbo; Editing by Leslie Adler, Marguerita Choy and William Mallard)