Updated: Jul 25, 2021
Dovish is a term used to describe a policy maker's stance on lower interest rate environments. Lower interest rates create economic growth as businesses and consumers take on more debt, increasing the money supply. Dovish policy makers like to keep unemployment low over keeping inflation at target levels.
Learn what dovish means, how it works, and what it means for retail investors.
Table of Contents:
Dovish Explained with Examples
Dovish individuals prefer lower interest rates to keep low employment and stimulate the economy rather than control inflation at the target rates. Hawks believe that controlling inflation rates are more important than stimulating the economy. Hawkish or Dovish policymakers will always be in a constant debate on which is better at what time, and it all depends on the current economic health.
Dovish policymakers are generally seen as bearish on interest rates, whereas Hawks are bullish on interest rates. Dovish policies are less concerned about the risks of inflation and prefer economic expansion. For example, during the 2020 COVID-19 pandemic, policymakers worldwide started to take a Dovish stance and decreased interest rates. Lower interest rates enabled consumers and businesses to pay less back on loans allowing them to spend more in the economy.
Alternate names: Dove, Bear, Bearish, Conciliatory, Pacifist, Peaceful.
Another example of Dovish stances during the pandemic would be when the Central bank of Iraq implemented dovish policies. Iraq’s policies included:
Reducing the reserve requirement from 15% to 13%.
Reduced the interest rates on loans.
These measures helped the economy recover as it meant banks could lend out more money at a lower interest rate which means businesses and consumers indirectly have more disposable income.
Policymakers are constantly battling between easing or tightening interest rates so that inflation remains stable and their country can achieve full employment.
Interest religious facts related to policy stances are shown that protestants tend to be hawkish, Jewish tend to be Dovish, and catholic tend to be centrist.
How Dovish Works
Dovish policies or a doves' main goal is to encourage economic growth by following a “loose monetary policy”. This is fancy financial jargon for increasing the money supply instead of restricting it. Dovish policymakers will use lower interest rates to stimulate the economy.
Lower interest rates from a Dovish policy encourage the economy to employ more people, creating more jobs and lower unemployment. Inflation is the leading risk for low-interest rates as more jobs, spending prices, and wages increase. If prices start to exceed wages, this inflationary environment becomes dangerous and will have an opposite effect by reducing demand for products and services.
The main advantage of lower interest rates in a dovish environment is that borrowing is cheaper. Consumers take on more debt to purchase goods such as mortgages or paying on credit cards. This demand for goods and services encourages businesses to hire more people to keep up with the demand. Businesses also benefit from cheaper business loans to help them scale or expand their business.
Dovish vs. Hawkish
Most traders understand the constant battle between the bulls and bears in the market. Hawks and Doves are very similar in that they fight in which direction monetary policy should go.
There’s no better side to be on; being hawkish or dovish have pros and cons depending on the current economic situation. Traders must use currency correlations when understanding the hawkish and dovish policies to help gauge the directions of their assets.
For example, if an economy is growing rapidly, prices are rising, and wages aren’t keeping up, hawks can help bring prices back to a reasonable level. If the economy has slowed down, for example, due to a natural disaster like a pandemic, being dovish helps the economy recover from job losses and reduced spending.
What It Means for Retail Investors
Dovish policies have a direct impact on either stocks, bonds or foreign exchange (forex) rates. It’s essential to understand when central banks are looking to react towards inflation as this increases volatility in the market and potential shifts in sentiment.
Implementing dovish policies in a country can cause domestic stocks to rise but may cause their currency to weaken. Like global macro traders, investors may notice dovish policies and seek to ‘go long’ on specific equities or potentially ‘go short’ on a forex derivative.
Yahoo Finance. “Dovish vs Hawkish: Key Monetary Policy Differences.” Accessed July 20, 2021
Sylvester Eijffinger and Donato Masciandaro. “Hawks and Doves: Deeds and Words.” Accessed July 20, 2021.
International Monetary Fund. “Policy responses to COVID 19.”Accessed July 20, 2021.