Why Are Banks Slow to Lower Loan Interest Rates When the BI Rate is Low?

JAKARTA, KOMPAS.com - Amid the Bank Indonesia (BI) benchmark rate holding steady at a low 4.75% since September 2025, the decline in bank lending rates has progressed more slowly than anticipated. This situation raises questions about why borrowing costs have not fallen quickly, even as monetary policy direction has eased and interest rate transmission has begun. Data indicates that this transmission is indeed occurring, but it is not yet fully even and continues to face several structural obstacles in the banking industry. The decline is mainly supported by investment credit, which has fallen by 69 basis points. On the funding side, the weighted average interest rate for third-party funds (DPK) in rupiah has also decreased by 41 basis points year-on-year to 2.68%, primarily driven by lower deposit rates. The Head of Banking Supervision at the Financial Services Authority (OJK), Dian Ediana Rae, stated that the reduction in lending rates fundamentally depends on the funding interest rate conditions or cost of funds for each bank. According to her, one factor holding back the transmission of the policy rate to lending rates is the still intense competition in mobilising funds, particularly for large deposits. “The transmission of policy interest rates to the cost of funds can be held back mainly due to the still quite competitive competition for deposit funds, considering that customers with large deposits generally have higher bargaining power against banks,” said Dian. The issue of funding costs provides one of the main explanations for why lending rates do not immediately drop quickly following the BI Rate. Banks, according to Dian, still face pressure to retain deposit funds, especially from large depositors who receive special interest rates or special rates. BI Governor Perry Warjiyo emphasised that the transmission of monetary easing is actually still underway. This is reflected in the trend of declining deposit and lending rates over the past more than one year.