Dovish vs Hawkish: Monetary Policy

One of the factors that determine the return on investment is the current economic conditions and how the government and the policy makers involved react to these economic conditions. Dovish and Hawkish are two types of attitudes of monetary policy makers, also known as banks. central to dealing with changing economic conditions

before understanding the meaning of the two It is better to know both types of monetary policy. Monetary policy or central bank policy consists of two types namely contraction and expansion monetary policy.

Contractionary monetary policy is the policy of a central bank to increase interest rates as a hedge against inflation. While expansionary monetary policy is the policy of a central bank to lower interest rates to stimulate the economy, Dovish and Hawkish are two terms related to these two types of monetary policies.

Definition of Hawkish

Hawkish comes from hawk which means eagle. In the context of monetary policy, hawkish is used to represent central bank board members who tend to prioritize low inflation over economic growth.

If a tough stance is approved by the forum Central banks generally pursue contractionary monetary policy by raising interest rates to stifle inflation. Hope with standard interest rate Increasingly, many people will reduce their consumption. (including using credit) and choosing to save money in a bank As a result, the amount of money in circulation in society decreases and the inflation rate drops again.

Definition of Dovish

Dovish comes from the word dove, which means dove. In the context of dovish monetary policy, it is used to represent members of the central bank’s Board of Governors who tend to focus on economic growth. Also known as a high level of economic activity. instead of keeping inflation low.

If such stance is approved by the meeting The central bank will pursue expansionary monetary policy by lowering the benchmark interest rate. The hope is with a lower benchmark interest rate. People will dare to borrow money from banks and not save too much money in these institutions. so that the economy can recover again

Pros and Cons of Hawkish Policy

Inflation and interest rates are two indicators of a financial economy that must be properly maintained and not overstated. Inflation -The price of goods increases at the same time- It’s common in economics. Inflation is often caused by the high money supply due to economic growth.

However, if it is too high, inflation can depress people’s purchasing power. For example, due to the increase in the price of pertalite from 7,500 to 10,000, 10,000 rupiah has already received 1.15 liters of pertalite. Only 1 liter can be purchased if the increase in fuel prices is out of control. As time goes by, people’s purchasing power will decrease and no one will be able to buy oil anymore.

Interest rates are also macroeconomic indicators to watch over. The low reference interest rate will make many people reluctant to borrow money from banks, causing the economy to turn around again. However, the very fast-spinning wheels of the economy lead to high inflation.

On the other hand, rising interest rates are expected to encourage people to save money in banks. So that the amount of money circulating in the community and inflation will decrease. However, if the policy of raising interest rates remains For too long, the economy will be sluggish because people don’t dare to develop their business by borrowing money.

Dovish vs Hawkish: Which is better?

Forum of Central Bank Governors (In Indonesia’s case, Bank Indonesia) must protect dovish (expansion monetary policy) or hawkish (contraction monetary policy) according to the current economic situation. The author himself likes to compare monetary policy to medicine for the national economy.

just like medicine Monetary policy requires prescriptions and dosages appropriate to the needs of the country at a certain point in time. in the context of monetary policy This appropriate amount also includes the replacement period of the relevant strategy or policy. Because in some cases, using too much cunning or guile will lead the country into crisis again.

An example is the policy Quantitative relaxation (QE) operated by Federal Reserve (Central Bank in the United States) during the 2008-2012 financial crisis and during the COVID-19 pandemic, both during the financial crisis and the pandemic. US benchmark interest rate (Federal Funds Rate) almost touched 0.

Quantitative relaxation (QE) is a central bank’s policy to buy back government bonds to increase the money supply in the market. lower interest rates (fierce) and finally reinvigorate the economy.

just in case Quantitative relaxation (QE) of the first to third wave (2008-2012). The Fed succeeded in recovering the US economy. This is marked by rising inflation and falling unemployment.

As a result, the Bank Interest Rate Relaxation in Uncle Sam’s country began to be revoked in 2013. In other literature, the interest rate easing revocation is also referred to as “revocation.” slender. which means In 2008-2012, the Fed generally used a compromise strategy, whereas in 2013, before the pandemic, it used a compromise strategy. The world’s leading financial institutions have adopted a hawkish strategy.

This is slightly different from the policy. Quantitative relaxation (QE) during the COVID-19 pandemic, the Fed started using this policy to protect the US economy from the impact of COVID on March 15, 2020. However, this policy will have to be curtailed or canceled immediately in 2022 due to high inflation. Affect the economy of the superpower in the first half of this year.

Even though it’s not even 0, Bank Indonesia has been doing a dovish strategy (cutting interest rates) during the COVID-19 outbreak. Down to 3.5%, BI7DRR gradually returned to respond to the country’s economic recovery after COVID-19. and to respond to global economic factors In October 2022, BI7DRR has returned to the 4.75% level.

Conclusion

Brute and fraudulent monetary policies must be chosen according to the current economic situation. Simply put, when the economy is in crisis, A compromising strategy is needed to restart the economy. However, if it feels like the wheels of the economy are moving too fast that inflation is high. A hawkish strategy will be used to stop this economic growth.