Citi explains what ’hawk’ and ’dove’ really mean as ECB faces leadership change

Citi has shed light on the meaning behind the terms "hawk" and "dove" used to describe central bankers, particularly in relation to the European Central Bank (ECB). These terms are not simply about whether a central banker favors raising or cutting interest rates, but rather reflect differing perspectives on how inflation evolves.

The distinction between hawks and doves could become increasingly significant for the ECB as its president may depart early, and several senior leadership changes are anticipated in 2027. Citi predicts that an early announcement of the president's departure could happen, potentially enabling governments to coordinate appointments to three crucial positions on the ECB's Executive Board.

Doves perceive inflation as arising from imbalances in supply and demand. They differentiate between persistent supply shocks, which call for stronger monetary policy action, and temporary external shocks like a spike in energy prices, advocating a more patient approach. Hawks, on the other hand, place a greater emphasis on inflation expectations.

They argue that even temporary price hikes can shape expectations and influence future inflation, necessitating a quicker policy response to prevent expectations from losing their anchor.

This distinction also impacts how policymakers assess the risks associated with policy mistakes. Doves are typically more concerned about inflation falling too low, as it becomes challenging to revive demand once interest rates approach the lower bound. Hawks, however, are more apprehensive about inflation overshooting its target, contending that upward price pressures can become entrenched more rapidly than deflationary forces.

Citi notes that the ECB's recent communication has shifted towards focusing on underlying inflation dynamics and how monetary policy affects the economy, rather than just short-term inflation projections. The bank anticipates the next ECB president, likely to be Pablo Hernández de Cos or Klaas Knot, to play a significant role in determining how the central bank balances these considerations.