The Reserve Bank of Australia (RBA) says it expects global economic growth to stall in the coming year, keeping the door open for more cash rate cuts in 2012.
The RBA elected to cut the cash rate by 25 basis points - to 4.25 per cent - at its December board meeting, citing economic instability in the eurozone and moderating inflation for its decision.
It was the second cut in a row for the RBA, after it had left rates on hold for a whole year.
In its statement released today, the central bank 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 in the minutes.
"Overall, members concluded that growth in the world economy was likely to weaken over the coming year."
Against this backdrop, the central bank said the Australian economy seemed to have strengthened compared to earlier in the year, with the mining boom fuelling investment growth.
"Members noted that while mining-related expenditure was exceptionally strong - estimated to have grown over 50 per cent over the past year - there were also solid increases in investment in other sectors, including manufacturing," the RBA said.
"The investment outlook remained very strong, with a small upward revision to spending plans for 2011/12 from what was an already very positive outlook."
This outlook was confirmed by the national account figures, released one day after the RBA's meeting, which showed growth of 1.0 per cent in the September quarter, after an increase of 1.4 per cent in the June quarter.
However, the RBA acknowledged a variation in strength across sectors, with notable drops in building approvals and continuing caution in consumer sentiment.
But the risk of dampening economic activity - as a result of the turbulence in Europe - was the deciding factor in the central banks' decision to drop the cash rate in December, along with the expectation of on-target inflation.
