Long-run relationship of prime lending rate toward reference rate of monetary authority in Indonesia

This research investigates the relationship between the Prime Lending Rate in the banking sector and the reference interest rate of the Bank of Indonesia (BI) as the monetary authority. The period selected for this research is based on monthly historical data of two different reference rate applied in Indonesia, which are the BI rate for the period of January 2014 to September 2016, and the BI 7 Days Repo Rate (BI7DRR) for the period of October 2016 to December 2020, which replaced the previous period. It is expected that the new tools provided by the central bank should have a relationship with the prime lending rate in order to penetrate the market optimally. The Phillips-Peron unit root test and Johansen Cointegration test were conducted to estimate the relationship. The results show that the BI rate is a valid long-term determinant of the banking prime lending rate, while the BI7DRR was not effective.