Monetarism in Australia 2025: Impacts on Inflation and Your Money

Monetarism isn’t just a textbook concept—it’s a powerful economic philosophy that’s shaping the Reserve Bank of Australia’s (RBA) approach to inflation, interest rates, and the money supply in 2025. As headlines buzz about rising prices and global uncertainty, understanding monetarist thinking can help Australians make sense of what’s happening in their wallets and investment portfolios.

What Is Monetarism? A Quick Refresher

Monetarism is an economic theory that argues the money supply is the main driver of economic growth and inflation. In other words: control the amount of money in the economy, and you can control inflation and, to some extent, economic stability. The most famous monetarist, Milton Friedman, famously said, “Inflation is always and everywhere a monetary phenomenon.”

• Key principle: Too much money chasing too few goods leads to inflation.

• Policy focus: Central banks should manage the growth of money supply, rather than trying to fine-tune the economy through fiscal policy.

• Modern context: In 2025, monetarist ideas are influencing central banks as they grapple with post-pandemic inflation and global supply shocks.

Monetarism and the RBA: The 2025 Policy Landscape

The Reserve Bank of Australia has always paid close attention to money supply, but 2025 has brought monetarist thinking back into the spotlight. As the RBA battles to keep inflation within its 2–3% target band, it’s using classic monetarist tools:

• Interest rates: After aggressive hikes between 2022 and 2024, the RBA began a cautious pause in early 2025. This reflects concerns about overshooting and triggering a recession—a key monetarist warning.

• Quantitative tightening: The RBA has scaled back bond purchases and is allowing its balance sheet to shrink, effectively reducing money supply growth. This move aligns with monetarist prescriptions for taming persistent inflation.

• Focus on M3: Economists are tracking broad money supply (M3), which in Australia saw double-digit growth during the pandemic but has since moderated to a 5% annual pace in 2025, easing inflationary pressures.

While some critics argue that monetarism ignores the complexities of modern economies, its core message—control money growth to control inflation—remains at the heart of RBA decision-making.

How Monetarist Policies Affect Everyday Australians

Monetarist-inspired policies have real-world impacts, from mortgage rates to grocery bills. Here’s what Australian households and investors need to know in 2025:

• Borrowing costs: With interest rates stabilising, new home loans and credit cards aren’t expected to get much more expensive this year. However, repayments are still well above pre-pandemic levels, squeezing household budgets.

• Inflation outlook: As money supply growth slows, price rises for essentials like food and energy are beginning to ease. The latest ABS data shows headline inflation has fallen from 5.4% in 2023 to 3.1% in Q1 2025.

• Investment strategy: Savers are benefitting from higher term deposit rates, while share market investors face a more cautious environment as growth moderates. Monetarist logic suggests avoiding over-leveraged assets in times of tighter money.

Case in point: In early 2025, several major banks increased savings account rates to 4.5% p.a., reflecting tighter monetary conditions and a bid to attract deposits as money supply growth slows.

Monetarism’s Critics and the Road Ahead

While monetarism is making a comeback, it’s not without its critics. Some economists argue that focusing solely on money supply ignores the roles of supply chains, global shocks, and fiscal policy. Others point to Japan’s long period of low inflation despite expanding money supply as evidence that velocity and expectations also matter.

Still, in a world where inflation has re-emerged as a top concern, the monetarist toolkit is front and centre. For Australians, this means:

• Expect a cautious RBA, focused on gradual moves and clear communication about money supply trends.

• Be prepared for ongoing debates about the right balance between monetary and fiscal policy.

• Monitor your household budget and investments as the monetary environment shifts, with an eye on both inflation and interest rates.