JAKARTA (REUTERS) - Indonesian inflation surged to a near two-year high in March, breaking through the central bank's target level and underlining the challenges facing a new Bank Indonesia governor and whoever replaces him as finance minister.

Annual headline inflation in March was 5.90 per cent, compared with 5.31 per cent in the previous month.

The jump, driven by climbing prices for staple foods, will add pressure on the central bank to raise either its record low benchmark interest rate or its overnight deposit facility rate (FASBI) at a policy meeting on April 11.

"The inflation surge is worrying. And while core inflation is better behaved, the inflation spike raises the risk of a Bank Indonesia rate increase at the next meeting," said Mr Chua Hak Bin, economist at Bank of America Merrill Lynch in Singapore.

Analysts warned that Indonesia could see capital outflows if the central bank maintains its benchmark policy rate at 5.75 per cent, a record low level that has not changed since February 2012. They said a rate rise would bolster the rupiah, which in 2012 was emerging Asia's weakest currency.

The headline inflation for March was the highest since May 2011 and above the central bank's target range of 3.5-5.5 per cent for this year. A Reuters poll had forecast a March pace of 5.57 per cent.

The statistics bureau said that March core inflation, which strips out volatile food and fuel prices, slowed to 4.21 per cent from 4.29 per cent the previous month.

The March data "will present an interesting test to see how the incoming central bank governor places weight on the headline versus core inflation," said Dr Santitarn Sathirathai, an economist at Credit Suisse in Singapore.

Parliament last week approved Finance Minister Agus Martowardojo to become central bank governor in May, but there is still no word on who will replace him to become President Susilo Bambang Yudhoyono's third finance minister in as many years.

The statistics bureau also announced a trade deficit for February of US$330 million (S$409 million), twice as large as forecast in a Reuters poll. Exports were 4.5 per cent lower than in February 2012. The last time Indonesia had a monthly trade surplus was in September.

Monday's data adds to uncertainty over the management of the economy whose currency has been pressed down by trade and current account deficits while worries over inflation have made the government reluctant to tackle costly fuel subsidies that are digging a growing hole in the state budget.

The rupiah wasn't much affected by the data. At 0718 GMT, it was trading in Singapore at 9,737, or 0.2 per cent weaker than the previous close.

Trade and current account deficits have been factors putting pressure on the rupiah, which last year lost about 6 per cent against the dollar. This year, it has shed about 1.1 per cent.

Dr Yudhoyono is expected to announce later this week new measures to restrict the use of subsidised fuel. But with elections due next year, and memories fresh of violent protests over fuel-price rises in 2005 and 2008, he is expected to bow to the populist wishes and not scrap subsidies.

A presidential economic advisory group has recommended the administration slap a nation-wide ban on the use of subsidised fuel by the country's 11 million private cars, a move that could save the government US$8.6 billion this year and erase the widening fiscal deficit.

A survey released on Monday indicated that domestic demand - central to economic growth - remains strong in Indonesia.

Manufacturing activity in Indonesia rose in March and new export orders increased during the month, supported by a small boost in production triggered by strengthening new orders, a HSBC's Markit survey showed on Monday. The March purchasing managers' index climbed to a four-month high of 51.3, up from a 50.5 reading in February.