Bank Indonesia lowered BI's benchmark interest rate (Credit : Kompas)

Bank Indonesia decreases BI Reference Interest, what’s the effect?

Siti Fatimah Adri
Politics & Economic
News Flash Indonesia
Jul 19, 2019
1843
Bank Indonesia has decided to reduce benchmark BI 7 Days Reverse Repo Rate (BI7DRRR) by 25 bps to 5.75 percent. After since November 2018, it has held interest rates of 6 percent.

With the reduction in BI's benchmark interest rate, it will certainly affect deposit rates and lending rates in the foreseeable future, as said by PT Bank Central Asia Tbk (BCA) economist David Sumual.

According to BI Governor, Perry Wardjiyo, lowering of liquidity interest rates in the financial market will increase. As a result, loan interest rates can be reduced and bank deposits will decline, because BI has also lowered the minimum reserve requirement (GWM) of banks by 50 bps to 6 percent for conventional banks and 4.5 percent for Islamic banks that add liquidity to banks up to Rp. 28 trillion.

PT Bank Permata Tbk's VP Economist, Josua Pardede explained that before influencing loan interest rates, this BI rate cut would be responded in advance by the Interbank Money Market (PUAB) interest rate. According to him, the time needed is usually around three months for loan interest rates and one month for deposit rates, depending on the conditions of liquidity and credit risk of each bank.

The decline in BI's benchmark interest rate is expected to contribute to lowering bank lending rates. Because cost of funds of the bank will also decrease along with the interest rate cut by the central bank. The cost of fund itself is the cost needed by the bank to obtain deposits, after previously added with the required reserves determined by the government.

Source: https://money.kompas.com/read/2019/07/19/064400626/penurunan-suku-bunga-acuan-bi-bakal-turunkan-bunga-kredit-bank-kapan-