Monetarist Theory in Australia: 2025 Impact on Economy & Policy

As Australians navigate a turbulent economic landscape in 2025, one economic theory continues to spark debate among policymakers and investors alike: Monetarist Theory. Championed by Nobel laureate Milton Friedman, monetarism argues that the supply of money in an economy is the main driver of economic growth and inflation. But what does this mean for Australia right now—and for your financial future?

What is Monetarist Theory?

Monetarist Theory centres on a simple but powerful premise: controlling the money supply is the most effective way to manage economic stability. Unlike Keynesian approaches, which often focus on government spending and fiscal stimulus, monetarists argue that steady, predictable increases in the money supply foster long-term economic growth, while erratic or excessive expansion leads to inflation.

• The Quantity Theory of Money: Monetarists base their outlook on the equation MV = PQ, where M is money supply, V is velocity of money, P is price level, and Q is output.

• Policy Focus: The theory suggests central banks should target a fixed growth rate for the money supply, rather than adjusting interest rates in response to short-term economic fluctuations.

Monetarism in Australia: 2025 Policy Landscape

Australia’s Reserve Bank (RBA) has historically leaned more toward interest rate targeting than strict monetarist controls, but 2025 has brought new relevance to monetarist ideas. After a period of high inflation in the early 2020s, the RBA has been under pressure to tighten the reins on money supply growth.

• Inflation and Money Supply: As of early 2025, Australia’s annual inflation rate has eased to around 3.2%, down from highs above 7% in 2022. The RBA attributes this success in part to more cautious monetary expansion and renewed attention to monetarist principles.

• Policy Shifts: In the latest Monetary Policy Statement, the RBA outlined a commitment to “measured and transparent management of monetary aggregates.” This echoes classic monetarist advice: avoid surprises and foster confidence in the value of money.

• Digital Currencies: With the pilot of the eAUD (Australia’s central bank digital currency) underway, monitoring and adjusting the money supply is becoming more precise—raising fresh questions about how monetarist strategies may evolve in a digital era.

Real-world example: In 2024, the RBA slowed its bond-buying program and allowed maturing assets to roll off its balance sheet, reducing the pace of money creation. This deliberate move, in line with monetarist thought, helped cool inflation and stabilise expectations across markets.

Why Monetarist Theory Matters for Households and Investors

Monetarist ideas aren’t just academic—they shape the rates on your mortgage, the returns on your investments, and the cost of living. Here’s how:

• Mortgage Rates: As the RBA tempers money supply growth, interest rates remain elevated compared to pre-pandemic levels. Households looking to refinance or borrow are directly affected by these policy choices.

• Inflation Expectations: If the central bank signals a strong commitment to controlling the money supply, markets and consumers expect more stable prices—helping anchor wage negotiations, rental agreements, and long-term contracts.

• Investment Strategy: Investors watch the RBA’s policy signals closely. A monetarist tilt may mean lower inflation premiums on bonds and a steadier environment for equities, while excessive money supply growth could erode returns in real terms.

For example, SMSF trustees and property investors in 2025 are increasingly factoring in the RBA’s stance on monetary aggregates when making allocation decisions, anticipating that tighter money supply management will keep inflation in check and support real asset values.

Challenges and Critiques: Is Monetarism Enough?

While monetarist theory has regained traction in the wake of inflationary shocks, critics argue it isn’t a cure-all. Australia’s open economy, with significant exposure to global commodity prices and supply chains, means that inflation can also be driven by factors beyond domestic money supply. In addition, the velocity of money—the rate at which money changes hands—can fluctuate, complicating the picture for central bankers.

• Global Events: The 2024–25 spike in global oil prices and supply chain disruptions showed that even tight control of the money supply may not fully insulate Australia from imported inflation.

• Changing Payments Landscape: As Australians embrace digital wallets and cryptocurrencies, the definition of “money” itself is shifting, posing new challenges for effective policy control.

Despite these headwinds, monetarist ideas continue to inform policy debates in Canberra and Martin Place, especially as the RBA seeks to maintain credibility and financial stability in a changing world.