Despite Bank Indonesia’s aggressive monetary easing, Indonesian borrowers are still waiting for meaningful relief on loan interest rates. The central bank’s benchmark rate has dropped to its lowest level since 2022, yet commercial lending rates remain stubbornly high. This disconnect reveals deeper structural frictions in the transmission of monetary policy—and the complex calculus behind bank pricing decisions.
Key Facts & Background:
- As of July 2025, Bank Indonesia (BI) has lowered its benchmark interest rate (BI Rate) to 5.00%, the lowest since 2022.
- Credit interest rates remain elevated at 9.16%, only slightly down from 9.20% at the start of the year.
- BI Governor Perry Warjiyo held discussions with banking leaders to accelerate the reduction of deposit and lending rates in line with the BI Rate cut.
- Banks have committed to lowering rates, but note that transmission takes time: deposit rates typically adjust within 3 months, while credit rates may take up to 6 months.
- Key barriers include high cost of funds (CoF), persistent deposit rates, and risk-based pricing models that factor in credit default risks.
- Bank executives from CIMB Niaga, Maybank Indonesia, and Allo Bank emphasized that credit rate reductions depend on deposit rate movements and underlying risk assessments.
Strategic Insights:
Monetary Policy Transmission: A Lagging Mechanism
The BI Rate’s descent to 5% reflects a proactive stance to stimulate economic growth amid subdued inflation and global uncertainty. However, the slow pass-through to commercial lending rates highlights a perennial challenge in Indonesia’s financial system: the time lag between policy shifts and market behavior. Structural factors—such as banks’ reliance on time deposits and cautious risk pricing—dampen the immediate impact of rate cuts on consumer and business credit.
Cost of Funds and Deposit Stickiness
Banks remain constrained by elevated deposit rates, which form the backbone of their funding structure. As noted by CIMB Niaga and Maybank Indonesia executives, credit rates cannot fall meaningfully until deposit rates decline. This “stickiness” is partly due to competition for liquidity and the need to maintain depositor confidence. The gradual reduction in deposit rates over the next quarter will be a key determinant of broader credit affordability.
Risk-Based Pricing and Prudential Discipline
Even as BI encourages credit expansion, banks are maintaining a cautious stance through risk-based pricing. Allo Bank’s emphasis on default risk underscores the balancing act between growth and financial stability. In an environment of rising household debt and uneven economic recovery, banks are unlikely to sacrifice prudential standards for short-term gains. This reinforces the need for complementary policies—such as credit guarantees or targeted liquidity support—to accelerate lending without compromising resilience.
Implications for Economic Growth and MSMEs
The delayed transmission of lower interest rates could dampen the intended stimulus effect, especially for micro, small, and medium enterprises (MSMEs) that rely heavily on bank financing. While BI’s liquidity injections and rate cuts aim to unlock credit, the real economy may not feel the benefits until late 2025 or early 2026. Policymakers may need to explore alternative instruments—such as subsidized lending schemes or fintech partnerships—to bridge the gap.