The two terms are often heard in a monetary policy meet review and are nothing more than a stance on the economy.
So, how is a dovish stance on a monetary policy different from hawkish outlook and what all factors come into play is all that shall be discussed herein:
Interest rates, inflation, unemployment scenario and the value of domestic currency are some of the important parameters worked out during the monetary policy whether it be hawkish or dovish.
Hawkish stance on monetary policy: It simply relies on the tenet that not all times can be good and at certain instances govt is bound to take corrective measures such as bring about the hike in interest rates in order to check the ballooning inflation rate.
This becomes necessary as the inflation has to be brought to a stable rate and this is done by a tightening stance. After the step has been taken economic activity slows down but only to gain momentum in the near future.
Meanwhile strength of the domestic currency is also boosted as against the other foreign currencies The erstwhile happens on the ground as the interest rate being increased in the hawkish tone often mean a higher rate in the country under suggestion and hence more flow of foreign funds which ups the attractiveness of the domestic currency thereby appreciating it in value.
Dovish monetary policy outlook: It's an opposite stance wherein interest rates are lowered to boost up economic activity and employment correspondingly. In the case, currency takes a southward direction or depreciates in value as now the other currency can gain favour given the low interest rate scenario.
The two stance are not completely in exact and can be to a relative degree depending upon the anticipation or expectation.
Understanding with example: For instance in the 2008 sub-prime crisis of the US, interest rates in the economy for short term basis were reduced to nearly 0% level which indicated a dovish stance to prevent the economy from sinking.