* Faster inflation leads analysts to see rate rise by Q2
* C. bank has said no 2010 rate rise if inflation on target
* Risk to mkt consensus if govt delays electricity price hike
By Neil Chatterjee and Sara Webb
JAKARTA, Feb 2 (Reuters) - The Indonesian central bank's pledge to keep interest rates at a record low this year is increasingly viewed by markets and analysts with scepticism.
Inflation, which has for years been regarded as Indonesia's Achilles' heel, in January picked up much faster than the central bank's prediction and there is further potential for prices to surprise on the upside in coming months.
"I'm actually not sure whether to believe them -- I think they will be obliged to hike by September," said David Cohen, economist at consultancy Action Economics.
"Global inflation may pick up more than people imagine, and they won't be immune."
Commodity prices have already pushed higher on the back of a global recovery, which is a big threat to inflation in Indonesia.
Asia's largest gasoline importer plans to import more gasoline than expected this month, while a sugar deficit also means imports from a market near record prices.
Other Southeast Asian central banks have signaled they could start tightening policy in the coming months as inflation and growth pick up. Last week the Philippines started to unwind policy by raising the rediscounting rate, while Thailand's central bank chief said there was less need to keep policy loose.
The bond market has priced in a rate rise in the third quarter while a slight majority of analysts in a Reuters poll see it coming by the end of June.
A delayed rate hike in Indonesia would risk a blow out in inflation with severe consequences, analysts warn.
"I think the end of the year will definitely be behind the curve. It could risk a rebound in the dollar-rupiah as investors might pull funds out and that could further feed inflationary pressures," said Joanna Tan, economist at Forecast in Singapore.
The rupiah plunged 9 percent in a single day in August 2005, when foreign investors dumped stocks and bonds, worried about the rising fiscal cost of subsidising energy, as well as inflation. Subsidies were cut and interest rates forced higher to fight inflation, resulting in a slump in consumption that accounts for about two-thirds of gross domestic product.
Failing to control inflation could also risk the country's aim to get back to investment-grade status, a prospect raised after its resilience during the financial crisis led Fitch Ratings to upgrade Indonesia last week to one notch below investment grade.
Top bond manager PIMCO sees Indonesia reaching investment grade in 3-5 years and that would put the country alongside BRIC nations such as Brazil and China.
ERODING CREDIBILITY
Bank Indonesia (BI) late last year flagged it would leave its key rate on hold throughout 2010 as long as it met its 4-6 percent inflation target, but it was largely ignored by traders and analysts who were convinced that inflation would rise faster.
Further denting BI's credibility, acting governor Darmin Nasution said on Jan. 29 that annual January inflation would be below 3 percent. Instead, on Monday, it picked up to an eight-month high of 3.7 percent from 2.8 percent in December. The central bank has said it did not expect a pick up in inflation the first half of the year.
Following the data, which also came in higher than market expectations, analysts in a Reuters poll see a 25 basis point rate increase to 6.75 percent in the second quarter, rising further to 7.25 percent by year-September. A similar poll last month produced median forecast of 6.5 percent and 7.13 percent respectively.
Ten-year bonds showed only muted reaction to CPI data although yields have risen over 30 basis points from a two-year low of 9.5 percent hit in mid-January, when China's central bank surprised by raising banks' reserve requirement rate.
The spread between three-month overnight rates and one-year swap rates have remained around 40 basis points since November, largely unmoved by comments from the central bank.
Indonesian officials have made blunders before. Nasution's predecessor as senior deputy central bank governor, Miranda Goeltom, said in December 2008 that it would be a mistake to cut interest rates if prices were high, just one day before BI embarked on an easing cycle and cut rates.
Still, the central bank's view on rates could still come true provided the government defers an electricity price hike, which was planned for January but which is now on hold indefinitely.
"It all depends on administered prices -- will they hike electricity prices and cut fuel subsidies? If not, inflation will be under control and there'll be no rate rise this year," said Anton Gunawan, chief economist at Bank Danamon, who sees no rate hike until early 2011.
An electricity price hike looks increasingly unlikely for political reasons as President Susilo Bambang Yudhoyono's top reformers, including Finance Minister Sri Mulyani Indrawati, have come under pressure over the government's decision to bail out a local lender in late 2008 during the financial crisis. (For a factbox on building inflation pressures in Southeast Asia see) (Editing by Kazunori Takada)