Hawkish and Dovish Central Banks
Interest rates are ultimately affected by a central bank’s view on the economy and price stability, which influence monetary policy. Central banks operate like most other businesses in that they have a leader, a president, or a chairman. It’s that individual’s role to be the voice of that central bank, conveying to the market which direction monetary policy is headed. And much like when Jeff Bezos or Warren Buffett steps to the microphone, everyone listens.
While the head of a central bank isn’t the only one making monetary policy decisions for a country (or region), what he or she has to say is ignored and revered. Central bank speeches incite a market response, so watch for quick movement following an announcement. Speeches can include anything from changes (increases, decreases, or holds) to current interest rates, discussions about economic growth measurements and outlook, and monetary policy announcements outlining current and future changes. But don’t despair if you can’t tune into the live event. News agencies make the information available to the public as soon as the speech or announcement hits the airwaves.
Currency analysts and traders alike take the news and try to dissect the overall tone and language of the announcement, taking special care to do this when interest rate changes or economic growth information is involved. Much like how the market reacts to the release of other economic reports or indicators, forex traders react more to central bank activity and interest rate changes when they don’t align with current market expectations. It’s getting easier to foresee how a monetary policy will develop over time due to increasing transparency by central banks. Yet there’s always a possibility that central bankers will change their outlook in greater or lesser magnitude than expected. Market VOLATILITY is high during these times, and care should be taken with existing and new trade positions!
Central bankers are described as “hawkish” when they support raising interest rates to fight inflation, even to the detriment of economic growth and employment.
They are known as “hawks,” and words like “tighten” and “heating up” will be used.
For example, “The Bank of England suggests the existence of a threat of high inflation.”
The Bank of England could be considered hawkish if it made an official statement about increasing interest rates to reduce high inflation.
On the other hand (or claw?), central bankers are described as “dovish” when they favor economic growth and employment over-tightening interest rates.
They also tend to have a more non-aggressive stance or viewpoint regarding a specific economic event or action.
They are known as “doves,” and words like “soften” and “cooling down” will be used.
This picture summarizes the difference between hawkish and dovish monetary policies