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w/c 17 June 2024: The US data highlight this week is Retail Sales on Tuesday, with global Flash PMI data on Wednesday. Plus on the central bank side we get the RBA, PBoC, SNB and BoE all in play

Hawkish Explained

Beginner

The term “hawkish” is applied to any person or organisation that approaches a situation with an aggressive response. For financial markets, the term tends to mostly be associated with central banks and their outlook for monetary policy.

A central bank (or central banker) is hawkish if its response to an overheating economy is to use aggressive monetary policy. If inflation is higher than desired, then this might illicit a hawkish response of raising interest rates quickly.

The opposite of a hawkish approach to monetary policy is a “dovish” approach. A dovish response is considered to be more cautious, more tolerant of inflation and slower to raise interest rates.

N.B. The term hawkish can also be associated with geopolitics. If a politician was “hawkish on international relations”, they prefer an aggressive/belligerent approach to achieving their foreign policy goals.

Why be “hawkish” on monetary policy 

A hawkish central banker is worried about the impact of high levels of inflation on the economy. They would prefer to act quickly to bring inflation lower and to cool an overheating economy. Often a monetary policy hawk will overlook the negative impact on economic growth (and therefore the risk of rising unemployment) in favour of reducing inflation.

The classic hawkish monetary policy response is to raise interest rates quickly.

Hawks and Doves

The majority of the time, the monetary policy setting committee will vary in opinion. There will be some on the committee that are naturally hawkish (these are known as monetary policy “hawks”) and some that are dovish (known as monetary policy “doves”).

The impact of “hawkish” monetary policy 

If a central bank is hawkish on monetary policy, there will tend to be an impact across a country’s asset classes:

  • Bond yields – raising interest rates (or sometimes just the threat to raise rates) will drive investors to sell government bonds and therefore bond yields will rise.
  • Currency – all things remaining equal, a more hawkish monetary policy will be positive for a currency. With interest rates higher, hot money flows towards a relatively more attractive currency.
  • Equities – hawkish policy means higher interest rates, which means it is more expensive for corporates to borrow and grow. Equities will tend to struggle in a more hawkish monetary policy outlook.

Editor

Richard is an independent market analyst with over 20 years of experience working for brokers in London. Most recently he has worked with Hantec Markets and Infinox, focusing on trading education, ana... Continued

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