Higher BI Rate Threatens Investment, Consumer Spending: Think Tank

Higher BI Rate Threatens Investment, Consumer Spending: Think Tank

Jakarta. Bank Indonesia’s cumulative 100-basis-point interest rate hike between May and June is beginning to weigh on the real economy, with higher borrowing costs likely to delay business investment, curb household spending, and eventually slow credit growth, according to the Center of Reform on Economics (CORE) Indonesia.

Higher interest rates have made bank financing more expensive, prompting companies to postpone expansion plans that rely on loans, said Akhmad Akbar Susanto, Director of Macroeconomic, Fiscal, and Monetary Policy Research at CORE Indonesia, during the Core Mid-Year Economic Review 2026 in Jakarta on Wednesday.

“When interest rates rise, companies may decide not to proceed with their investment because borrowing becomes too expensive. As a result, investment gets delayed,” Akhmad said.

Bank Indonesia raised its benchmark BI-Rate by a total of 100 basis points between May and June 2026. The central bank first lifted the rate by 50 basis points to 5.25% in May, followed by a 25-basis-point increase to 5.50% at its weekly Board of Governors meeting on June 9. It then raised the benchmark rate by another 25 basis points to 5.75% at its regular June policy meeting before leaving it unchanged in July.

Akhmad said higher interest rates are also squeezing household consumption as mortgage holders and consumers planning to finance vehicle purchases face rising borrowing costs.

“As financing becomes more expensive, some people may no longer be able to afford it and choose to postpone purchases. That, in turn, puts pressure on the real sector,” he said.

The impact will also spread to the banking sector as higher policy rates are gradually transmitted into lending rates, reducing demand for credit.

“Eventually, the data will show that when interest rates are higher, bank lending growth tends to slow,” Akhmad said.

Despite the tighter monetary policy, bank lending still expanded 12.67% year-on-year in June, accelerating from 11.51% growth in May. Bank Indonesia expects credit growth to remain within its 8-12% target range this year.

Meanwhile, undisbursed loans stood at Rp 2,490 trillion ($137.855 billion), equivalent to 21.52% of total committed lending facilities, indicating banks still have substantial unused credit lines available to borrowers.

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