• News & Article
• The Paradox of Rate Cuts: Lower Rates Don't Always Heal the Market!

The Paradox of Rate Cuts: Lower Rates Don't Always Heal the Market!

"Whenever you find yourself on the side of the majority, it is time to pause and reflect" - Mark Twain.

The recent rallies in both global and domestic equity markets are largely driven by strong investor expectations for interest rate cuts. The Fed has become the main focus as it is perceived as being behind other central banks in cutting rates.

What's more, Bank Indonesia has already cut the BI Rate four times throughout 2025 from 6% to 5%. This means BI decided to act ahead of the curve based on the following considerations: (1) controlled inflation at 1.5% - 3.5%; (2) stable Rupiah; and (3) the need to boost the economy.

The Paradox of Rate Cuts

"Lower rates = Higher bond and stock price"
This belief is held by investors and serves as a strong catalyst driving rallies in both global and domestic equity markets.

Looking at historical data,
The IHSG has indeed tended to strengthen when interest rates are cut, as occurred in 2008-2009 (IHSG +87%) and 2016 (IHSG +15%) within 8-9 months following rate cuts.

Looking at current conditions,
When the BI Rate was cut four times since early 2025 from 6% to 5%, shares that are 'typically' sensitive to interest rate changes have actually remained flat and tend to decline.

What we're seeing now:
- The banking sector, represented by five major banks (BBCA, BBRI, BBNI, BMRI and BBTN), has fallen an average of -13% YTD and is at the same price level as 2022.
- The property sector, represented by four major property developers (BSDE, CTRA, SMRA and PWON), remains under pressure at -4% YTD and is still at the same price level as 2020.
- The infrastructure sector, represented by TLKM and JSMR, is also holding at the same price level as 2020.

It's NOT about the rate.. It's ALL about the economy!
The reality that lower rates do not automatically revive certain stocks illustrates that there are other factors investors must consider. After all, the stock market is a forward-looking mirror of the economy.

 

Two important factors are currently under scrutiny:
- Money supply (M2) that is very low and continues to decline since 2007. When M2 slows, IHSG movements are also relatively limited.
- Revised corporate earnings that are lower and reflect a sluggish real economy, both in terms of production and consumption.

These issues unfortunately cannot be resolved easily and quickly 'only' through interest rate cuts. The positive transmission effect of BI Rate cuts on the economy will naturally take time.

In today's market, rallies can unfold in an instant, as buying and selling is just a click away. So, stay wise!

Check out the full story in our latest Market Insight: syailendracapital.com/investment-report