The Reserve Bank of Australia contemplated a smaller rate cut in November, but the risks of weakening demand prompted the board to opt for a hefty 75 basis point move.
But by the time the meeting was held only a few days later, the minutes reveal RBA governor Glenn Stevens proposed the board choose between cuts of 50 or 75 basis points.
The board opted for the bigger move on the day of the meeting, bringing the cash rate to 5.25%.
The bottom line was that the economic outlook was worsening despite all the government and the RBA, helped by a lower exchange rate, had done to try to improve it.
"At the meeting, the governor proposed that members consider the choice between a reduction of 50 basis points and one of 75 basis points,'' the minutes released today said. "Key factors in members' consideration of the policy decision were the continuing poor conditions in financial markets, the significant deterioration in the outlook for the world economy, with implications for Australia, and the likelihood that inflation in Australia would fall over the year ahead.''Global growth outlook worsens
Growth in developed and developing economies had deteriorated further, with the board noting the slowdown, particularly in China, would hamper growth in Australia.
"However, the marked deterioration in global financial conditions over the past couple of months, which had also had an affect on Australian financial markets and share prices, was likely to to have a significant effect as well as on business and consumer sentiment,'' the minutes said. "This would probably lead to a significant curtailment of planned investment spending and caution on the part of households.''
Since the board met on November 4, there has been further gloomy economic news, as more developed countries announced their economies had fallen into recession.
The 15-member euro zone went into recession, while Australia's largest export market, Japan, announced on Monday it had two consecutive quarters of economic contraction.
Exports offer less insulation
The minutes contain more reason for a grim outlook.
The rising value of Australian commodities exports will likely offer less insulation to the domestic economy against the global downturn, the RBA said.
"The terms of trade were expected to fall noticeably over the forecast period as bulk commodity prices were adjusted down again."
Since the global financial crisis erupted and began to push down expectations of global growth, the RBA's language has grown more dire.
Inflation not chief concern
The minutes said board members noted consumer price index (CPI) inflation was still high in the September quarter, hitting 5%, but inflation no longer seems to be a chief concern of the RBA.
While the CPI is above the RBA's target of 2 to 3%, the board expects it to recede as slower growth and domestic capacity pressures eased.
"Global disinflationary forces from the slowdown in the world economy and lower commodity prices would assist in this regard,'' the minutes said. "The depreciation of the exchange rate, however, meant that the decline in inflation to the target could take longer than previously thought.''
The Australian dollar has declined more than 30% to about 64.7 US cents since hitting its all-time high, 98.48 US cents, in mid-July this year.
"In the short term, CPI inflation would be reduced by recent falls in petrol prices; if current petrol prices were sustained, they would produce a noticeable fall in headline inflation in the December quarter. This could assist in containing inflation expectations."
The price of a barrel of oil has dropped from a record $US147 in July to $US50 today.
More cuts possible
Another sizeable cut in the cash rate in November was appropriate, which would help borrowers and lift confidence among consumers and businesses, the board said.
The central bank has cut the cash rate by a total of 2 percentage points since September.
"Given the changing balance of risks, there was an advantage in moving the setting of monetary policy quickly to a neutral position,'' the minutes said.
The minutes said board members believed a 75 basis point cut would not undermine the task of fighting inflation in the current economic environment.
But there was no opinion offered on whether the cut would be enough, nor any direct hint that more rate cuts were in the pipeline.
However, the bleak depiction of the economic situation and the obvious confidence that inflation has peaked and will soon start to fall suggest more cuts are by far the most probable course of action by the RBA.
"The only good news remains that inflation is yesterday's story," said Macquarie interest rate strategist Rory Robertson in a note to clients before the release of the minutes. "And so policy rates in many economies - including Australia - are in the process of being cut to new generational lows."
BusinessDay, with AAP
