Bank Indonesia Uses Liquidity Incentives to Control Credit Rate Hikes

Bank Indonesia (BI) is reinforcing its Macroprudential Liquidity Incentive (KLM) policy to curb potential increases in bank credit interest rates following a recent hike in the benchmark BI Rate. The central bank raised its policy rate by 50 basis points to 5.25 percent in May 2026, a move that could trigger faster growth in lending costs.

BI's strategy involves strengthening the interest rate channel of the KLM, which incentivizes banks to manage their credit rate adjustments. According to Dhaha P. Kuantan, Director of BI's Macroprudential Policy Department, banks that maintain a specific spread between the BI Rate and their new credit interest rates can receive optimal KLM incentives. "The hope is that when the BI Rate was adjusted by 50 basis points, banks would not immediately raise their credit interest rates," Dhaha explained.

The updated KLM scheme, effective August 1, 2026, shifts the incentive calculation from elasticity to the spread between the BI Rate and new credit rates. Banks keeping this spread below 3 percent will receive the maximum incentive of 1 percent of their third-party funds (DPK). Spreads between 3 percent and 6 percent earn 40 bps, while spreads between 6 percent and 10 percent get 10 bps. Rates above 10 percent receive no incentive.

In addition to the interest rate channel, BI is enhancing the KLM's lending channel into a financing channel. This involves adding non-traditional financing options, such as bank holdings of corporate bonds, which can count towards financing for micro, small, and medium enterprises (MSMEs), cooperatives, and sustainable sectors. BI maintains the maximum incentive for this financing channel at 4.5 percent of DPK, including the new non-traditional financing component, aiming to expand limited MSME financing.

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The hope is that when the BI Rate was adjusted by 50 basis points, banks would not immediately raise their credit interest rates.