Monetarism in 2025: The Money Supply’s Role in Australia’s Economy

In a world of rising inflation, central bank pivots, and unpredictable shocks, the question of how much money should circulate in the economy is back in the spotlight. Monetarism—the theory that the money supply is the main driver of economic activity and inflation—has a storied history in Australian policy debates. In 2025, with the Reserve Bank of Australia (RBA) recalibrating its toolkit, understanding monetarism is more relevant than ever.

What is Monetarism and Why Does It Matter in 2025?

Monetarism, popularised by economist Milton Friedman in the 1970s, claims that changes in the money supply are the main cause of economic fluctuations, especially inflation. For decades, Australia’s central bank focused on interest rates, not the money supply, to steer the economy. But the inflation shocks of 2022–2024—driven by pandemic spending, supply chain crises, and global energy turmoil—have rekindled debates about whether managing the money supply deserves a comeback.

• Global Inflation and RBA Response: After annual inflation peaked above 7% in 2023, the RBA increased the cash rate aggressively. Yet, monetary aggregates (like M3 and broad money) kept growing, raising questions about how much control the RBA really has.
• 2025 Policy Shifts: With inflation moderating but remaining above the 2–3% target, policymakers are reconsidering the balance between interest rate targets and money supply growth.
• Everyday Impact: For households and businesses, how much money is in the system can affect mortgage rates, job opportunities, and the cost of living.

The RBA’s New Approach: Monetarism Redux?

In 2025, the RBA has not officially returned to strict monetarist targets, but it’s giving money supply growth more weight in its economic models. The February 2025 Statement on Monetary Policy included a dedicated section on the growth of broad money, noting its role in predicting inflation over 12–18 months.

Key changes include:

• More Transparent Reporting: The RBA now publishes monthly updates on money supply measures, alongside its traditional focus on the cash rate and bond yields.
• Policy Mix: While interest rates remain the main lever, the RBA is using macroprudential tools (like lending restrictions) to control credit growth, indirectly influencing the money supply.
• Digital Currency Debate: The ongoing pilot of an Australian central bank digital currency (CBDC) could give the RBA more direct control over the money supply in coming years.

This approach reflects a ‘best of both worlds’ philosophy: using modern monetary policy tools but not ignoring the lessons of monetarism, especially the long-term link between money growth and inflation.

What Does Monetarism Mean for Australians Right Now?

Whether you’re a saver, borrower, or business owner, the renewed focus on money supply matters for your bottom line.

• Interest Rates: If money supply growth remains high, the RBA could keep rates higher for longer—even as economic growth slows.
• Inflation Outlook: The 2025 Federal Budget forecasts inflation to remain sticky, partly due to a lag between money supply growth and consumer prices. This means cost-of-living pressures could persist into 2026.
• Investment Markets: Investors are paying closer attention to monetary aggregates, as rapid money growth can fuel asset bubbles or signal future inflation risks.

For example, property prices in Sydney and Melbourne rebounded sharply in early 2025, coinciding with a surge in housing credit—a component of broad money. Meanwhile, fixed-rate mortgage holders coming off ultra-low rates face higher repayments, as monetary policy tightens to rein in money supply and inflation.

Monetarism’s Critics and Limits in 2025

It’s important to note that monetarism is not a silver bullet. Critics argue that the relationship between money supply and inflation has weakened in the digital age. Financial innovation, global capital flows, and the rise of non-bank lenders mean that controlling the money supply is trickier than in the past.

Still, with economic uncertainty lingering, the core insight of monetarism—that too much money chasing too few goods fuels inflation—remains as relevant as ever. The challenge for Australian policymakers is finding the right mix of tools to keep the economy stable without stifling growth.