Monetary birds🤡

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Last week on this series we talked about animals in the marketplace and learnt how the market can be bearish or bullish. This week we extend the “ish” streak. Two weeks ago, the central bank in Nigeria increased the monetary policy rate by 100bps and this increase was identified as a hawkish stance. If that term seemed foreign to you, we would be explaining how policies by the central bank(monetary policies) can either be classified as hawkish or dovish.

Dovish and hawkish monetary policies are two different approaches used by central banks to manage the economy. These terms are often used to describe the stance of a central bank on how it intends to manipulate interest rates and money supply to achieve its macroeconomic goals.

Dovish monetary policy is a policy that prioritizes promoting economic growth and reducing unemployment over controlling inflation. Central banks with a dovish stance typically keep interest rates low and engage in other easing measures such as purchasing government bonds to increase the money supply and stimulate economic activity. This policy is considered dovish because it is more accommodating to economic growth and less focused on controlling inflation. Think dove, think gentle. The central bank is being “gentle” on the economy by creating policies more accommodating for businesses to thrive

On the other hand, a hawkish monetary policy is a policy that prioritizes controlling inflation over promoting economic growth and reducing unemployment. Central banks with a hawkish stance typically raise interest rates and engage in other tightening measures to reduce the money supply and slow down economic activity. This policy is considered hawkish because it is less accommodating to economic growth and more focused on controlling inflation. An example, although foreign would be the increase in interest rates seen in the American economy. The Federal Reserve has continued to increase interest rates (currently at 4.7) in order to control inflation. This increased interest rate, although for the greater good (reducing inflation) has affected companies evident in the recent earnings season.

To learn

It is important to note that central banks may switch between a dovish and hawkish stance depending on the current state of the economy. For example, if the economy is in a recession, a central bank may adopt a more dovish policy to stimulate economic growth. Conversely, if the economy is overheating, a central bank may adopt a more hawkish policy to control inflation. While a dovish policy prioritizes promoting economic growth and reducing unemployment, a hawkish policy prioritizes controlling inflation. The appropriate policy stance depends on the current state of the economy and the central bank's macroeconomic goals.