Despite aggressive monetary easing, Indonesia’s banking sector has been slow to pass on lower interest rates to consumers and businesses. Bank Indonesia (BI) has cut its benchmark rate by 125 basis points in 2025, yet deposit and lending rates have barely budged. This disconnect threatens to dampen credit expansion and undermine efforts to boost economic momentum.
Key Facts & Background:
- BI Rate Cuts:
- Bank Indonesia reduced its benchmark interest rate by 125 basis points in 2025, bringing it to 5%.
- Deposit Rate Movement:
- One-month deposit rates declined only 16 basis points, from 4.81% in January to 4.65% in August 2025.
- The slow decline is attributed to “special rate” financing for large depositors, which accounts for 25% of third-party funds in banks.
- Lending Rate Movement:
- Average lending rates fell just 7 basis points, from 9.2% to 9.13% over the same period.
- BI’s Position:
- Governor Perry Warjiyo emphasized the need for banks to lower both deposit and lending rates to support credit growth.
- BI views this as a critical step in promoting higher economic growth through increased financing activity.
- Contextual Timing:
- These remarks were made during BI’s September 2025 Board of Governors Meeting press conference.
Strategic Insights:
The sluggish transmission of monetary policy into commercial banking rates reflects structural rigidities in Indonesia’s financial system. While Bank Indonesia has taken decisive steps to ease monetary conditions, the muted response from deposit and lending rates suggests that banks are prioritizing margin preservation over credit expansion. This cautious stance, particularly in maintaining high rates for large depositors, limits the effectiveness of monetary stimulus and delays broader economic recovery.
The persistence of elevated lending rates poses a challenge for businesses—especially MSMEs and sectors reliant on working capital financing. With credit growth closely tied to investment, consumption, and job creation, the slow rate adjustment risks constraining Indonesia’s ability to reach its targeted 5% GDP growth. BI’s call for rate reductions is not merely technical—it’s a strategic imperative to unlock liquidity and channel it into productive sectors.
To accelerate rate transmission, coordinated efforts are needed across fiscal, regulatory, and banking domains. BI may consider enhancing its forward guidance, incentivizing rate adjustments through liquidity tools, or collaborating with financial regulators to address pricing behavior. At the same time, banks must reassess their risk models and cost structures to align with macroeconomic goals.