Today’s 100 basis point (1 percentage point) cut in the official interest rate is the economic equivalent of a severe jolt from a defibrillator. And the result has been a dramatic convulsion throughout Australian financial markets.

Today’s 100 basis point (1 percentage point) cut in the official interest rate is the economic equivalent of a severe jolt from a defibrillator. And the result has been a dramatic convulsion throughout Australian financial markets.

The stockmarket roared its approval, with the All Ords rallying more than 200 points from its daily low of 4,395. Markers in the short-term money markets also surged, including 90-day bank bills (where the yield fell 60 basis points) and three-year government bonds (where the yield fell more than 25 basis points). For those unfamiliar with money markets, a fall in yield equates to a rise in price.

Meanwhile, in another corner of the financial markets, the reaction was more subdued. The price of 10-year government bonds actually fell, before rising a little. These long-dated bonds are more sensitive to inflation expectations, and they greeted the RBA’s move warily.

And you can see why. Australia’s money supply (M3) has been growing at a jaw-dropping rate for more than 12 months now. The latest data, for August, showed a 19% year-on-year increase. This kind of wanton money-printing is likely to lead to higher inflation down the track and lowering the price of money so dramatically is not likely to help. In trying to alleviate the immediate and pressing problem of the global credit crisis, there’s every chance the RBA is setting the Australian economy up for even bigger challenges in future.