The ornithology of monetary policy

Since ancient times, doves have symbolised peace and hawks aggression. During the Vietnam War, “hawks” became a widely used term to describe those who argued for increased military intervention, whereas the “doves” were those in favour of de-escalation and negotiation.

It is not clear when this language spilled over to the decidedly less animated world of central banking, but today it is common to describe monetary policymakers – either in their individual capacity or as a policymaking collective - as hawks or doves. Hawks are tough on inflation, while doves tend to focus more on unemployment and economic growth.

Birds of a feather, flocking together
Central banks were decidedly dovish when Covid hit, slashing rates and injecting liquidity into markets on an unimaginable scale. They then opted to be lenient on nascent signs of inflation last year, hoping that it would prove transitory. No more. Central banks have turned hawkish en masse, with World Bank data showing more central banks hiking interest rates this year than at any time in the past. In other words, in the space of two years we’ve gone from extraordinary monetary easing to record tightening as deflationary fears have been replaced by fears of persistently high inflation.

The pace of increases has been accelerating in many cases. For instance, Sweden’s Riksbank kicked off a busy week of central bank decisions by raising its policy rate by 100 basis points, the biggest increase in 30 years. Whereas 25 basis point increments had been standard practice in many countries for many years, in 2022 that quickly gave way to 50, then 75 basis point moves. For some, 100 might be the new 75.

What is even more remarkable is that Sweden maintained negative interest rates until very recently, while the European Central Bank also had sub-zero rates as late as June this year. The Swiss National Bank also joined the negative interest rate club in 2015, a move that many considered to be bizarre. It moved back into positive territory last week with a 75 basis points increase. The Bank of England also hiked its rate last week by 0.5%.

Click here to read more...