After a stellar 2010, during which the country's economic planners could seemingly do no wrong, analysts are now questioning whether the central bank's reluctance to hike interest rates in the face of increasing inflation could undermine their hard-won credibility.

Already this year there has been a mini-run on the stock market, bond yields have risen 200 basis points and the rupiah has dipped as concern that Bank Indonesia is behind the curve on policy has spooked the market.

Yet the governors at the vast and gleaming bank headquarters in Central Jakarta seem unmoved, content to keep the core interest rate at 6.5 percent – the same record low level it has held for more than 18 months – even as many other central banks in the region have tightened policy.

"This is a period when fund owners, especially foreigners, really want the BI rate to be raised," the central bank governor, Darmin Nausution, told a briefing of senior editors this week, flanked by his more somber deputies. "Indeed, a BI rate hike will reduce liquidity in the economy, more or less cutting consumption [and] reducing inflationary pressures – but it can also invite more capital inflows."

At the heart of the bank's caution lies the fear that the "hot money" that has poured into Indonesia and many other emerging markets in the past 18 months could just as quickly evaporate, plunging the country into chaos like that in 1998, when longtime President Suharto resigned amid massive social unrest caused by the Asian financial crisis.

But while the governors see the clamor for a rate rise as a hoped-for, self-fulfilling prophecy by outsiders, the economists making those calls are questioning the bank's credibility. "They are missing the global context," said Wellian Wiranto, a Singapore-based economist with HSBC, referring to mounting inflationary pressures around the world.

Inflation, driven mostly by higher food prices, has become a major concern for emerging economies that rode out the global financial crisis with flying colors – with Indonesia leading the charge. The Jakarta stock exchange rose more than 40 percent in 2010, fueled by an influx of foreign money that stood at Rp 18.2 trillion ($2 billion) in September last year – more than 60 percent of the bourse's total capitalization.

The debt market has also been flush with foreign funds in search of yields developed nations can only dream of, forcing the central bank and Finance Ministry to impose a series of creeping measures in the hope of checking volatility. The rupiah climbed to three-year highs in November.

Since Jan. 4, though, when the central bank again kept the base rate unchanged, the market has hit back. The bourse has shed as much as 10 percent this month, although it has made a bit of a recovery, bond yields are climbing and the rupiah is again drifting, although underpinned by central bank intervention, as foreigners seek to take out some of their money.

At the heart of it all lies inflation. Bambang Brodjonegoro, head of fiscal policy at the Finance Ministry, said on Thursday that full-year 2011 core inflation was seen at 4 percent to 5 percent, with headline inflation at 6.1 percent to 6.6 percent – higher than a government budget target of 5.3 percent and the central bank's 4 percent to 6 percent.

Annual inflation hit a 20-month high of 6.96 percent in December. Skeptics note the central bank has had a tough time containing inflation in the past. In its last bout with high food and fuel prices in 2008, inflation topped 12 percent and it was forced to raise rates to as high as 9.5 percent even as the global financial crisis intensified and other central banks were slashing borrowing costs.

In 2005-06, inflation raced up to more than 18 percent and BI hiked rates from 8.5 percent to 12.75 percent in just six months.

"They are focusing too much on backward data, on core inflation, and ignoring the headline inflation trends going forward," said Helmi Arman, an economist from Bank Danamon in Jakarta.

In a side street next to the central bank's headquarters, many of the institution's 6,000 employees take their lunch at one of the ubiquitous stalls selling favorites such as rice or noodles, jazzed up with a sambal sauce of chilies. The price of these staples has risen sharply in recent months, and ordinary Indonesians are asking what will be done to curb inflation.

Purbaya Yudhi Sadewa, an economist at the Danareksa Research Institute, is a rare dissenting voice who thinks the central bank is on the right track. "Inflationary pressure is coming mostly from the supply side," he said. "In the short term, the non-harvesting season of December-January has influenced inflation."

And what of his fellow economists calling for a rate hike? "Most of them are from the banking sector, and therefore they have a vested interest," he said. The central bank next meets to decide policy on Friday.