CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 77% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 77% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

Hawkish Vs Dovish: Differences Between Monetary Policies Explained

Reading time: 5 minute(s)
A hawk vs a dove

As an essential tool employed by central banks worldwide, monetary policy plays a crucial role in steering the ship of economic stability, growth, and prosperity. By carefully adjusting interest rates, managing the money supply, and utilising a range of tools at their disposal, central banks navigate the unpredictable waves of inflation, unemployment, and overall economic health.

This article delves into the intricacies of monetary policy, unravelling its mechanisms and shedding light on the powerful influence it wields. We will explore the fundamental objectives, tools, and approaches employed by central banks to maintain price stability, foster sustainable economic growth, and keep unemployment at bay. Understanding how monetary policy shapes the economic tide is crucial for policymakers, economists, and individuals alike, as it directly impacts livelihoods and the overall financial well-being of nations.

Moreover, we will uncover fascinating facts about monetary policy, such as the origins of the hawkish and dovish terms, tools utilised by central banks, including interest rate adjustments, open market operations, reserve requirements, and the enigmatic concept of quantitative easing. By illuminating the inner workings of monetary policy, we aim to provide a deeper understanding of the forces that shape economies and the strategies employed by central banks to maintain a delicate balance. 

What do the terms Hawkish and Dovish mean?

Hawkish and dovish are terms used to describe different approaches to monetary policy. These terms primarily refer to the stance taken by central banks in managing interest rates and controlling the money supply to achieve specific economic goals. The term "hawkish" and "dovish" originated from the world of bird-watching. "Hawks" are known for their aggressive and vigilant nature, while "doves" symbolise peace and gentleness. These characteristics were metaphorically applied to describe different approaches to monetary policy. When it comes to monetary policy, being hawkish means keeping a sharp "eye" on inflation and swooping in to control it. Hawks generally believe that the primary goal of monetary policy should be to control inflation, even if it means slowing down economic growth. They favour raising interest rates to keep inflation in check. Whereas the term dovish refers to an economic policy advisor who advocates for monetary policies involving low-interest rates. Doves argue that inflation is not bad and that it is bound to have few negative effects on the economy. They believe that low interest rates are necessary to stimulate borrowing, economic growth and job creation.

What is a Monetary Policy?

Monetary policy refers to the actions and measures taken by a country's central bank or monetary authority to manage and control the money supply, interest rates, and other monetary variables in an economy. Its primary objective is to achieve specific economic goals, such as price stability, sustainable economic growth, and low unemployment. Monetary policy is one of the key tools available to policymakers to influence the overall economic conditions in a country.

Central banks use various tools to implement monetary policy. Some of the common tools include:

  • Interest Rates: Central banks can adjust short-term interest rates, such as the policy or overnight lending rate, to influence borrowing costs for banks and other financial institutions. By raising or lowering interest rates, central banks can influence spending and investment decisions, impacting economic activity.
  • Open Market Operations: Central banks can buy or sell government securities, such as treasury bonds or bills, in the open market to control the money supply. When they buy securities, they inject money into the economy, while selling securities withdraws money from circulation.
  • Reserve Requirements: Central banks can set reserve requirements, which are the minimum amounts of reserves that banks must hold against their deposits. By adjusting these requirements, central banks can influence the amount of credit available in the banking system and control lending activities.
  • Quantitative Easing: During times of economic crisis or when interest rates are already low, central banks may resort to quantitative easing. This involves purchasing large quantities of government bonds or other financial assets to increase the money supply and stimulate economic activity.

The specific approach and tools used in monetary policy can vary depending on the country's economic conditions, objectives, and the central bank's mandate. The aim is to strike a balance between promoting economic growth, maintaining price stability, and addressing other macroeconomic challenges.

It's important to note that fiscal policy, which involves government spending and taxation, works in conjunction with monetary policy to shape the overall economic environment and achieve desired outcomes.

What are the differences between Hawkish and Dovish Monetary Policies?

Hawkish Monetary Policy:

  • Focus: Hawkish monetary policy emphasises controlling inflation as its primary objective. It aims to maintain price stability by keeping inflation levels low and within a target range.
  • Interest Rates: A hawkish stance typically involves raising interest rates to curb borrowing and spending, which can help reduce inflationary pressures. Higher interest rates make borrowing more expensive, discouraging businesses and consumers from taking on excessive debt.
  • Tightening Money Supply: Hawkish policy also involves reducing the money supply or limiting its growth. This can be achieved by selling government securities or tightening lending standards for banks, making it harder for businesses and individuals to access credit.
  • Economic Impact: Hawkish policies tend to prioritise fighting inflation over stimulating economic growth. By raising interest rates and limiting credit, it can slow down economic activity, including consumer spending and investment, in the short term.

Dovish Monetary Policy:

  • Focus: Dovish monetary policy prioritises promoting economic growth and reducing unemployment. It is more lenient towards higher inflation in the short term to support economic expansion and job creation.
  • Interest Rates: A dovish stance typically involves lowering interest rates to encourage borrowing and spending. Lower rates make borrowing cheaper, stimulating business investment and consumer spending.
  • Expanding Money Supply: Dovish policy may involve expanding the money supply through measures such as buying government securities or lowering reserve requirements for banks. This increases the availability of credit and makes it easier for businesses and individuals to borrow.
  • Economic Impact: Dovish policies aim to stimulate economic activity and employment. By lowering interest rates and increasing the money supply, it encourages borrowing, investment, and spending, which can lead to increased economic growth in the short term. However, there is a risk of higher inflation if not carefully managed.

Central banks often adopt hawkish or dovish stances based on their assessment of current economic conditions, including inflation levels, employment rates, and overall economic performance. They may adjust their policies over time as the economic situation evolves. The choice between hawkish and dovish policies depends on the central bank's objectives and their assessment of the trade-offs between inflation and economic growth. It is worth noting that policies vary for different countries. 


Whether you should invest during a dovish or hawkish market depends on your investment goals and risk tolerance. Dovish markets are characterised by low interest rates and loose monetary policy. This can be a good time to invest in growth stocks, as they tend to benefit from lower borrowing costs. However, dovish markets can also be volatile, as investors worry about inflation and the potential for a recession. Hawkish markets are characterised by high interest rates and tight monetary policy. This can be a good time to invest in value stocks, as they tend to do well in a rising interest rate environment. However, hawkish markets can also be slow-growth, as businesses may be reluctant to invest and hire in a more restrictive environment. Ultimately, the best time to invest is when you have a long-term investment horizon and you are comfortable with the level of risk. 

Here are some additional factors to consider when making your decision:

  • Your age and retirement goals. If you are nearing retirement, you may want to focus on preserving your capital and avoiding risk. In this case, a dovish market may be a better option.
  • Your risk tolerance. If you are comfortable with risk, you may be able to take advantage of the potential for higher returns in a hawkish market.
  • The overall economic environment. If the economy is strong, a hawkish market may be a better option. However, if the economy is weak, a dovish market may be a better option.

It is imprtant to remember that there is no one-size-fits-all answer to this question. The best time to invest depends on your individual circumstances and goals.


There are a few things you can look at to determine whether a market is dovish or hawkish. One is the level of interest rates. If interest rates are low, then the market is likely dovish. If interest rates are high, then the market is likely hawkish. Another thing to look at is the tone of central bank communication. If central bankers are talking about keeping interest rates low and stimulating economic growth, then the market is likely dovish. If central bankers are talking about raising interest rates and controlling inflation, then the market is likely hawkish.

 The best type of market for you depends on your individual investment goals and risk tolerance. If you are looking for growth, a dovish market may be a better option. If you are looking for income, a hawkish market may be a better option. 

Some examples of dovish central banks include the Bank of Japan and the European Central Bank. These central banks have kept interest rates low for an extended period of time in order to stimulate economic growth. Some examples of hawkish central banks include the Federal Reserve and the Bank of England. These central banks have raised interest rates in recent years in an effort to control inflation.


Written by

Eleana Ntagia

This content has been created by XTB S.A. This service is provided by XTB S.A., with its registered office in Warsaw, at Prosta 67, 00-838 Warsaw, Poland, entered in the register of entrepreneurs of the National Court Register (Krajowy Rejestr Sądowy) conducted by District Court for the Capital City of Warsaw, XII Commercial Division of the National Court Register under KRS number 0000217580, REGON number 015803782 and Tax Identification Number (NIP) 527-24-43-955, with the fully paid up share capital in the amount of PLN 5.869.181,75. XTB S.A. conducts brokerage activities on the basis of the license granted by Polish Securities and Exchange Commission on 8th November 2005 No. DDM-M-4021-57-1/2005 and is supervised by Polish Supervision Authority.

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