Inflation won’t affect spread; may push up costs: BI

Recent inflationary surges will not affect the interest spread in the nation’s banking system — but may result in higher cost of funds for banks, according to the central bank.

BI Governor Darmin Nasution said that the central bank’s soon-to-be-launched prime lending rate regulation would push the spread lower.

“The inflation rate actually does not affect [the interest] spread, so with the prime lending rate regulation we are slowly pushing banks’ spread down,” he said.

“Higher inflation means a higher cost of funds, but that’s not the issue. We are looking at the spread that will be reported to BI in terms of margin, fees, costs, etc...,” Darmin told reporters after Friday prayers at BI headquarters in Jakarta.

Starting on March 31, 44 banks, which have more than Rp 10 trillion in capital, will be required to announce their prime lending rate, more commonly known as their base lending rates, on their official websites, the mass media and announcement boards at branches.

The prime lending rate is the rate given to banks’ prime customers who offer zero risks and are the most trustworthy clients of the banks. The regulation is aimed at creating competition in the banking industry, which in turn is expected to lower rates due to stiff competition.

“The prime lending rate is not designated to lower the cost of funds. It’s to lower banks’ spread,” Darmin said, adding that Indonesia’s banking interest spread, which reflected the difference in borrowing and lending rates, remained higher when compared to neighboring countries in ASEAN. Higher spreads mean higher interest incomes for banks.

The interest spread in Malaysia and Thailand currently stands at about 3 percent and about 4 percent in the Philippines, he added when asked about an ideal spread for Indonesia.

“In Indonesia, the spread is about 5 point something percent. So don’t dream of achieving Malaysia’s level,” Darmin said

Gadjah Mada University economist A. Tony Prasetiantono, also a commissioner at Bank Permata, said if inflation continued to increase and BI raises its key rate, lending rates would increase as part of bank adjustments to increasing costs.

Depositors suffered a 0.5 percentage point negative real interest rate last year with nearly 7 percent inflation and a 6.5 percent benchmark interest rate by year-end, he added.

“If inflation surges, deposit rates must increase so that depositors can enjoy positive real interest rates. Then if deposit rates are increased, lending rates will follow,” Tony told The Jakarta Post in a text message.

However, in an official statement the central bank said that the latest a quarter-of-a-percentage-point increase in the BI rate has had little impact on bank lending rates as base lending rates have remained rigid at about 12 percent since the beginning of this year.

“There’s no indication that the February BI rate increase was followed by an increase in bank lending rates,” BI spokesman Difi Johansyah said in the statement.

Indonesian banks have targeted more than 24 percent loan growth this year, according to business plans submitted to the central bank, higher than last year’s 22.8 percent.

Higher loan growth is needed to back faster economic growth, BI deputy governor Muliaman Hadad said previously, in reference to the government’s 6.4 percent economic growth target this year versus 6.1 percent last year.