The likelihood of another interest rate cut by the central bank in February hinges on how the eurozone debt crisis unfolds, economists say.
In the minutes of its December board meeting, published on Tuesday, the Reserve Bank of Australia (RBA) warned global economic growth was likely to stall in 2012.
The RBA signposted eurozone instability as its reason for cutting the cash rate by 25 basis points to 4.25 per cent on December 6 when the central bank board met.
This theme was reinforced in Tuesday's minutes, with the RBA pointing to a likelihood of an economic downturn on world markets.
'It seemed highly likely that the sovereign credit and banking problems would weigh heavily on economic activity there (in Europe) over the period ahead, and there was a non-trivial possibility of a very sharp contraction,' the RBA said.
Deutsche Bank senior economist Phil O'Donaghoe said that uncertainty in the eurozone had forced the RBA's hand' despite a generally rosy domestic outlook.
'The overall picture for the Australian economy is a healthy one, supported by the mining boom, but against that there are these very significant and uncertain headwinds from Europe,' Mr O'Donaghoe said.
The RBA was also concerned about the impact of this turmoil on Australia's trading partners in Asia, Mr O'Donaghoe said.
He said he expected another two cash rate cuts by the RBA, driven by a lack of confidence in global markets.
'Uncertainty breeds an unwillingness to take investment decisions and consumption decisions, and therefore a weaker economic outlook.'
Westpac chief economist Bill Evans said the minutes highlighted how concerned the RBA board had become with the European situation.
'With such clear emphasis being placed on Europe ... and likely underwhelming data on the labour market, the housing market and the consumer (spending), the case remains strong for a follow-up (rate cut) move in February with another 25 basis point cut timed for May,' he said.
However, ICAP senior economist Adam Carr said that, looking solely at domestic data, there was no reason for a rate cut.
He said the RBA had noted that the Australian economy was continuing to strengthen on the back of mining-related investment growth.
Mr Carr said the RBA had made it clear that the possibility of further rate cuts next year hinged on events in Europe.
'If Europe doesn't stabilise then certainly they will cut again,' he said.
The Australian dollar rose after the minutes were released at 1130 AEDT.
At 1129 AEDT, the currency was at 99.16 US cents before climbing to 99.41 US cents by 1141 AEDT and settled at 99.31 US cents by 1310 AEDT.
