Analysts forecast two more overnight cash rate cuts by the Reserve Bank of Australia (RBA). By how much will the cut be and when will it be made depends on the impact of the European recession and its effect on global growth, particularly in China.

If the RBA decision would be based on Australia's economy, minutes of the RBA Monetary Committee's Dec 6 meeting indicated there is no strong need to cut rate in the meantime.

The hesitancy to reduce interest rates, which was recently cut to 4.25 per cent, is due to the RBA being optimistic about the economic future of Australia because of its booming mining sector as more infrastructure projects which used to be on the pipeline are expected to come on stream in 2012 even as the country's housing and retail sectors exhibit continued signs of weakness.

The RBA also pointed out that Australia's trading partners still enjoyed solid growth which is also another indicator of lack of an urgency to reduce overnight cash rates. However, the Australian central bank observed that developments in Europe continued to pose downside risks to the global economy, including Australia.

"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.

"Uncertainty breeds an unwillingness to take investment decisions and consumption decisions, and therefore a weaker economic outlook," the bank explained.

That will provide scope for a modest reduction in interest rates, analysts said.

Economists said the back-to-back key lending rate cuts would likely be in February and March, which would end the cutting cycle initiated in November and December.