Loan Interest Predicted to Rising Due to Benchmark Interest Rise

Bank Indonesia (BI), as of October 2022, raised the benchmark interest rate by 50 basis points to 4.75 percent. This policy is predicted to lead to an increase in bank lending rates of up to 100 points in the coming months.

Senior Faculty of the Indonesian Banking Development Institute (LPPI) Amin Nurdin said that ideally, banks would increase loan interest by at least 100 basis points (bps) from the current value. The increase can vary depending on the structure of the cost of funds of each bank.

“Ideally, an increase of at least 100 bps from the present value, although it must be reviewed before they [the bank] releases in the first quarter of 2023 because it is a bit difficult to determine now, it will definitely damage the plan to achieve the credit growth target in 2022,” he said, quoted Tuesday (25/10/ 2022).

Amin said with these conditions, plus the shadow of a recession next year, people’s purchasing power and credit growth will be affected. He estimates that the increase in a credit next year will not differ much from the realization in 2022.

On the other hand, Segara Institute Executive Director Piter Abdullah assessed that the transmission of the increase in the benchmark interest rate to loan interest takes around 3-6 months. This adjustment will occur gradually.

“We cannot say how much the loan interest rate hike will be because the increase will be gradual following the increase in the benchmark interest rate. In addition, the conditions of each bank are also different,” he said.

Previously, Bank Indonesia (BI) since August – October 2022 has raised the benchmark interest rate by 1.25 percent or 125 bps so that the BI 7-Day Reverse Repo Rate (BI7DRR) is currently at the level of 4.75 percent.

According to him, the central bank will still raise the benchmark interest rate until the end of 2022 because it follows the benchmark interest rate of the United States (US) central bank or the Federal Reserve (Fed).

“If BI raises for example another 100 bps until next year, [then] the benchmark interest rate will be 5.75 percent. The total increase is 225 bps, so banks are expected to raise interest rates around the same time, but gradually,” he said.

However, Piter stated that the increase in bank lending rates will not reduce people’s purchasing power even though credit growth may be restrained due to the increase in BI’s benchmark interest rate.

“The increase in the benchmark interest rate will restrain credit growth but does not mean reducing the positive performance of banks so far. Banks can still maintain their performance by increasing credit supervision, channeling credit selectively,” he added.