Monetary policy: Hawkish vs Dovish

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Hawkish / Dovish are two opposing terms. They are used to describe a central bank’s policy approach. The members of the bank's management board decide which policy to adopt. Each member has a different positioning and not all of them are 100% hawkish or dovish.Some may be more neutral, or moderate.

Definition of Hawkish monetary policy

Hawkish monetary policy is aimed at fighting inflation.When there is a Hawkish approach, the central bank uses all possible means to combat this inflation, which it considers to be the utmost threat that can exert recessionary pressures.Economic growth is not a priority. All means could be used to combat inflation, including an increase in interest rates.

An example of this, is the monetary policy pursued for years by Jean Claude Trichet at the ECB, which made fighting against inflation its priority.

A Hawkish policy is generally applied in a period of economic growth or recovery. In theory, a Hawkish policy is favourable to the currency appreciating on Forex.

Definition of Dovish monetary policy

Dovish monetary policy is aimed at economic growth. When there is a Dovish approach, the central bank uses all possible means to promote economic growth. Inflation is not a concern.

A Dovish policy is marked by a fall in interest rates and the use of unconventional measures (I am thinking in particular of quantitative easing) to boost the economy.

In recent years, the main central banks (FED, ECB, BoE, BoJ) have implemented a Dovish monetary policy.

A Dovish policy is usually applied in a period of recession or overheating of the economy. In theory, a Dovish policy depreciates the currency on Forex.

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