Could Interest Rates on Loans Still Go Down?

The room for further reduction in domestic bank lending interest rates is shrinking. The US Federal Reserve (The Fed)'s 25 basis point (bps) increase in its benchmark interest rate to 1 percent makes it increasingly unlikely that Bank Indonesia (BI) will cut its benchmark BI 7-day reverse repo rate. This is especially true given that The Fed still plans two more interest rate hikes by the end of 2017. BI will likely maintain its benchmark interest rate at 4.75 percent until the end of the year.

To further lower lending rates, banks must also cut deposit rates. However, this could cause depositors, particularly those with deposits, to seek more profitable investment alternatives, potentially triggering an outflow of foreign funds.

The average lending rate for working capital in Indonesian Rupiah at general banks in January 2017 was 11.35 percent, down from 11.38 percent the previous month and lower than the 12.48 percent recorded in January 2016. The average investment lending rate in January 2017 was 11.17 percent, down from 11.21 percent the previous month and lower than the 11.96 percent recorded in January 2016. Similarly, the average consumer lending rate in January 2017 fell to 13.58 percent from 13.59 percent the previous month and was lower than the 13.91 percent recorded in January 2016.