BI Rate Cuts To 5.5 Percent Will Have A Positive Impact On Banking And The Real Sector

JAKARTA - The decline in the benchmark interest rate or BI-rate to 5.5 percent is expected to have a positive impact on the economy gradually, especially through transmission to banks and the real sector.

"In the short term, this decision will reduce the cost of interbank funds (PUAB), which then lowers the deposit interest rate and ultimately the loan interest rate," said Head of Bank Permata Economist Josua Pardede quoting Antara.

Based on general practice, he continued, adjustment of deposit interest rates can occur within about a month, while transmission to credit interest rates takes 3 6 months, depending on liquidity conditions and banking credit risk.

Thus, lower lending rates will be seen more noticeably in the second half of 2025.

Furthermore, the Banking BI survey shows that credit disbursement standards have become looser since early 2025 and are expected to continue to be relaxed in the second quarter of 2025. The Lending Standard (ILS) indicator is negative indicating that banks are starting to lower lending rates and relax administrative requirements.

"As a result, new credit is estimated to grow significantly in the second quarter with the SBT reaching 81.99 percent, up from 55.07 percent in the previous quarter. Types of credit such as mortgages, multipurposes, and working capital loans will be the main driver of this growth," he added.

In terms of macroeconomics, the transmission of monetary easing to GDP has a time lag. In this context, the combination of lower BI-Rate, easing liquidity (via a reduction in the PLM ratio), and accommodative macroprudential policies (such as increasing the bank's foreign funding ratio and expanding the credit priority sector) are considered to have the potential to encourage increased bank credit.

"If this happens in conjunction with fiscal stimulus and increasing government spending in the second semester, domestic demand is expected to strengthen, thus supporting the recovery of GDP, which previously only grew 4.87 percent yoy in the first quarter of 2025," said Josua.

However, Josua reminded that the positive impact still depends on several factors.

First, exchange rate stability must be maintained so that inflation expectations remain low. Second, policy transmission must be supported by the banking response to lower interest rates. Finally, people's purchasing power needs to be strengthened so that credit demand increases effectively.

"Therefore, while still considering various global risks and challenges to the domestic economy, especially household consumption, we still estimate that Indonesia's economic growth in 2025 will remain below 5 percent," he said.

BI through the Board of Governors' Meeting (RDG) in May 2025 which was held on Tuesday (20/5) and Wednesday (21/5) decided to cut the benchmark interest rate or BI-Rate by 25 basis points (bps) to a level of 5.5 percent.

The deposit facility interest rate decreased by 25 bps to a level of 4.75 percent. Likewise, the lending facility interest rate was decided to decrease by 25 bps to a level of 6.25 percent.