The possibility of further interest rate cuts hinges entirely on developments in Europe's government debt crisis, economists say.
In the minutes of its December board meeting, released today, The Reserve Bank of Australia (RBA) warned economic growth was likely to stall in 2012.
The RBA cut interest rates by 25 basis points to 4.25 per cent at the meeting, citing economic instability in the Eurozone.
In the minutes, the RBA said that growing turbulence in the eurozone - and the flow-on effects on world markets - had been a dominating factor in the decision.
"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.
"Overall, members concluded that growth in the world economy was likely to weaken over the coming year."
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.
"So obviously there's no need to cut interest rates there."
He said the central bank had made it clear that the possibility of further rate cuts next year hinged on events in Europe.
"There was no guidance but they gave us the signpost: Europe," he said.
"So we've just got to watch that," he said.
"If Europe doesn't stabilise then certainly they will cut again."
Deutsche bank senior economist Phil O'Donaghoe said that European economic turmoil was the main driver of the December rate cut, as explained in the minutes.
"At face value, the board even notes that the story for the domestic economy suggests that there's no strong reason to cut interest rates, but we know that they did cut the cash rate," he said.
"The overall picture (for the Australian economy) is a healthy one in terms of aggregate demand, supported by the mining boom, but against that there are these very significant and uncertain headwinds from Europe.
"That's what's forced the RBA's hand."
The central bank was aware of how weakness in the eurozone could impact on global economies, including Australia's trading partners, Mr O'Donaghoe said.
"They're concluding that the most likely outcome is going to be weaker demand from Europe, and that's going to affect Asia," he said.
"That's consistent with our thinking - we're looking for another two rate cuts, and that's due to the general lack of confidence globally in the economic story.
"Uncertainty breeds an unwillingness to take investment decisions and consumption decisions, and therefore a weaker economic outlook," Mr O'Donaghoe said.
Westpac chief economist Bill Evans said the minutes highlighted just how concerned the RBA board has 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.
The Australian dollar rose after the minutes were released at 11.30 AEDT.
Prior to the release, at 11.29 AEDT, the currency was trading at 99.16 US cents. It climbed to 99.41 US cents by 11.41 AEDT and settled at 99.31 US cents by 13.10 AEDT.
