Bank of Korea back-to-back rate hike concerns eased as the won exchange rate recently declined to the 1,400 level, with market participants citing the 2007 precedent as a factor reducing consecutive hike probability. The sole non-pandemic back-to-back rate increase occurred in July-August 2007, coinciding with the subprime crisis onset. Bond market dealers note the BOK's current 8-meeting annual schedule differs from the monthly meetings held in 2007, though no official guidance has been provided on consecutive hike intentions.
2007 Back-to-Back Rate Hikes Preceded Subprime Crisis
The Bank of Korea raised rates consecutively in July and August 2007, citing robust export growth and sustained increases in investment and consumption. In July, the BOK lifted rates from 4.50% to 4.75%, stating in its monetary policy direction statement that "domestic economic conditions continue an upward trajectory with exports maintaining high growth momentum while investment and consumption steadily increase." The August hike to 5.00% followed similar reasoning, with the central bank assessing that "the degree of monetary accommodation will be significantly reduced through this increase."
BNP Paribas Fund Suspension Triggered Credit Crunch
On August 9, the evening of the BOK's second consecutive rate hike, French bank BNP Paribas announced suspension of redemptions for three asset-backed securities (ABS) funds due to US subprime mortgage issues. While US subprime problems had persisted earlier, the BNP Paribas decision is evaluated as the starting signal for global credit tightening. This development became a precursor to the 2008 global financial crisis.
BOK Implemented 325bp Cuts Over Five Months
Following the crisis onset, the Bank of Korea executed historic rate cuts totaling 325 basis points from 5.25% to 2.00% over five months spanning September through February. The reversal prompted internal reflection on whether aggressive tightening was necessary given potential external risks affecting the domestic economy. The BOK excluded the pandemic period (2022-early 2023) when evaluating price diffusion index data during recent parliamentary reporting, treating 5-6% consumer price inflation as exceptional circumstances.
Bond Dealers Assess Current Policy Outlook
A securities firm bond dealer stated, "There appear to be few reasons to pursue back-to-back rate hikes, though the Monetary Policy Board is unlikely to publicly declare it will not do so, which requires attention." Another dealer noted, "The Monetary Policy Board met monthly in 2007 but now convenes 8 times yearly, creating potential pressure that not hiking back-to-back means waiting two months."
FAQ
What was the Bank of Korea's only non-pandemic back-to-back rate hike?
The Bank of Korea raised rates consecutively in July and August 2007, increasing from 4.50% to 4.75% in July and from 4.75% to 5.00% in August, citing strong export growth and sustained consumption and investment increases.
Why did recent won exchange rate movements reduce back-to-back rate hike concerns?
The won exchange rate declined to the 1,400 level, decreasing market expectations for consecutive BOK rate increases in July and August, with the 2007 precedent cited as an additional factor lowering that probability.
