That's what I thought it was going to be as well, but I wasn't sure if that little bit of folklore was common in Japan. I've seen it in Overlord, but not anywhere else.
I keep thinking that Efa should become a priestess or something along those lines once she's older and stops working at Nobu, since she keeps having encounters with gods and spirits.
My guess is that he's trying to rally the people against the dragon. The soldiers from before seemed hesitant to attack after his betrayal was revealed, so if he convinces people that 'the dragon' killed a bunch of innocents, he'll have more bodies to throw around.
They literally have the source of all the Farley church's blessings on their island, who happens to be a dude who would HATE the church once they told him what's happened. They have such a massive upper hand in any negotiation with the church that it's laughable.