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Late last year, Bank Indonesia pledged to keep interest rates on hold throughout 2010 as long as inflation stayed within its target. That pledge was not repeated in a recent interview by central bank Deputy Governor Budi Mulya , raising questions among market watchers and economists, who as a result now anticipate a rate hike in the near future.

Finance Minister Sri Mulyani Indrawati said last week that inflation might pick up to 5.5 percent, and up to 5.7 percent on the back of higher commodity prices. Inflation has already accelerated to 3.72 percent in January from 2.8 percent in December, exceeding a market forecast of 3.6 percent.

Inflation is the one factor that could derail the country’s strong economic growth. If the price of goods and services rise too steeply, that will erode consumer confidence and affects spending, which in turn hurts producers. Inflation also weakens the rupiah against other major currencies, making imports more expensive.

A weak rupiah is also, effectively, a tax on the people as they see their assets depreciate in value and their life savings eaten away. A weakening currency also sends out a signal of an economy that is less than robust, keeping investors away.

This is a vicious cycle that is nearly impossible to get out of once the economy is caught up in it. It has taken more than a decade for successive governments to work their way out of just such a vicious inflation cycle following the financial and political crises of 1998.

Low inflation and a strong rupiah are the best benchmarks for how the central government is managing the economy. Anything but low inflation means ineffective management by the central government of its fiscal affairs. This is critical, as mismanagement of the economy would be disastrous for the nation.

Both the central bank and the government have several tools at their disposal to ensure that inflation is kept in check. Bank Indonesia kept its benchmark rate at a record low of 6.5 percent earlier this month, noting that food prices would ease in the coming months due to better harvests. It also predicted that the rupiah would strengthen, thus helping to contain inflation from imports.

Recovering commodity prices should boost the country’s current account and underpin the rupiah. But global risk aversion also remains high, heightened by concerns over Greece’s debt crisis, indicating that the global financial crisis is far from over.

Indonesia may be in a comfortable situation at the moment, but events can change very quickly. The central government must remain cautious and ensure that inflation remains low, thus allowing the economy to grow without too many hiccups.