Hawks and doves definition

What are hawks and doves in monetary policy?

Hawks and doves are different words that people use to categorise policymakers who shape a central bank’s monetary policy. ‘Hawks’ are in favour of tighter policy, which often means higher interest rates; ‘doves’ are in favour of looser monetary policy, meaning lower interest rates, with the hope of stimulating spending and growing the economy.

Policymakers who identify as hawks are often called ‘hawkish’, and policymakers that identify as doves are called ‘dovish’.

What does it mean to be hawkish?

Hawks vote for tighter monetary policy to try and keep inflation under control. An effective way to do this is through higher interest rates, which encourages saving and discourages spending. This helps to reduce demand for goods and services. In theory, this should help to keep prices lower, and prevent inflation from rising.

Higher interest rates tend to have a negative impact on stocks and stock market indices within the affected economy, as investors sell their investments in favour of low-risk assets that still offer strong returns.

What does it mean to be dovish?

Doves vote for looser monetary policy. Loose monetary policy centres on low interest rates – which in theory encourages spending and discourages saving. That’s because when interest rates are low, savings accounts won’t offer competitive returns over time – which could mean that more people turn to investments. As a result, stock prices and market indices could rise.

Increased spending should help to boost economic growth – which could result in rising employment. But, looser monetary policy also has the risk of increasing the inflation rate, because people are buying more goods and services which might push prices up as demand rises.