Monetary policy: what are hawks and doves?
You may have heard the terms “hawks” and “doves” in relation to the economic factors that impact exchange rates – but do you know what they mean?
If you’ve monitored currencies, you might have noticed two of our feathered friends are used to describe the monetary policy stance of economists and central bank committee members. They will either fall under the category of a hawk or a dove.
In this article, I’ll explain all you need to know about these contrasting approaches to monetary policy – one of the main economic factors that influences exchange rates. So, next time you’re monitoring the market before exchanging your currency, the words hawkish or dovish will make perfect sense – and you can make informed decisions.
Hawks: Tighter policy to curb inflation
Hawks are central bank policymakers and economists who typically think tighter monetary policies, like higher interest rates, are required to temper inflation and economic growth. For example, from November 2021, the Bank of England (BoE) increased interest rates on 14 successive occasions to cool red-hot inflation. This hawkish approach largely supported the pound after borrowing costs were lifted to 5.25% – the highest level since February 2008.
Doves: Looser policy to stoke growth
Doves on the other hand typically favour looser monetary policy, like lower interest rates, to support growth and inflation. For example, in August 2024, the BoE implemented its first interest rate cut in over four years after inflation eased towards the central bank’s 2% target. Having lowered the key rate to 5%, the BoE reduced again to 4.75% in November. Another cut to 4.5% in February was prompted by a huge reduction in the UK growth forecast.
Monetary policy committees: the rate-setters
A central bank’s committee is responsible for voting on interest rates and assessing the risks to its long-term economic goals. During this process, committee members might take a hawkish or dovish stance having reviewed the economic and financial conditions. They also deliver speeches and provide forward policy guidance that has a hawkish or dovish tilt.
BoE’s Monetary Policy Committee
The BoE’s Monetary Policy Committee (MPC) comprises nine members: the Bank’s governor, three deputy governors, the chief economist and four external members appointed directly by the chancellor of the exchequer.
ECB’s Governing Council
The Governing Council is the European Central Bank’s (ECB) policymaking body. It’s made up of the six members of the executive board, plus the national central bank governors from the 19 Eurozone countries.
Fed’s Federal Open Market Committee
The Federal Open Market Committee (FOMC) is the division of the US Federal Reserve that sets monetary policy. It consists of twelve members: the seven members of the board of governors of the Federal Reserve System, the President of the Federal Reserve Bank of New York, and four presidents from the remaining 11 regional Federal Reserve Banks, who serve one-year rotating terms.