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Indonesia has had a great run these past 12 months. A fast-growing domestic economy coupled with low interest rates has resulted in strong consumer spending, allowing businesses to expand and invest in new plants, acquisitions and equipment.

The benign external conditions also helped the domestic sector and enabled Bank Indonesia to keep interest rates steady as inflation stayed relatively low.

Those conditions may now be changing and should prompt the central bank to revisit its stance on interest rates.

Inflation in Southeast Asia’s largest economy rose to the highest level in 15 months in July, fueled by rising food prices and a government-backed electricity rate increase.

The Central Statistics Agency (BPS) said the consumer price index rose 6.22 percent last month from a year earlier, and was up 1.57 percent from the 5.05 percent increase in June.

Both of these figures were higher than expected.

Although inflation is still manageable, the sharp rise in food prices is a concern, especially ahead of the fasting month when prices historically trend upward.

Both the central bank and the Ministry of Finance have to keep a close eye on rising prices to ensure the economy is not unduly stressed.

This is particularly critical as the impact of the recent electricity rate increase for industries, officially capped at 18 percent, might be more drastic than expected and secondary effects might linger going forward, given that some industries are reportedly facing 30 percent to 40 percent jumps in power costs.

The central bank now has a tough balancing act, and some hard work looms on the horizon. It has to keep the economy on a steady growth path while at the same time ensuring that inflation does not once again rear its ugly head.

To this end, Bank Indonesia must seriously consider revising interest rates upward in the coming months.

Bank Indonesia is one of the few central banks in the region that has so far kept its key interest rate steady. It currently stands at 6.5 percent, the same level since August 2009.

It is no secret that the central bank prefers to strengthen growth rather than respond to rising inflation by jacking up interest rates.

Fast-rising food prices, however, could wreak havoc on the economy.

The fact that some food prices have already shot up ahead of the fasting month of Ramadan means they will certainly not be coming down anytime soon.

Households will have to allocate a greater portion of their income for food, leaving them with less to spend on consumer items.

And if this carries on for too long, it would lead to businesses having to scale back, which would impact economic growth.

Market watchers expect Bank Indonesia to raise its key interest rate later this year in order to fight inflation. But it cannot afford to sit on its hands for too long.