In line with expectations, the Reserve Bank of Australia (RBA) delivered a 25 basis point rate cut on Tuesday, taking the benchmark interest rate to 3 percent - its lowest level since 2009. However, analysts remain divided on whether the central bank will push rates even lower next year.
While external conditions are improving for the resource-driven economy - including a stabilization in growth for top trading partner China, which is a positive for commodity prices - the domestic environment remains fragile illustrated by sluggish retail sales and falling job advertisements.
"I think we're close to the end of the easing phase. China's growth looks like it has bottomed. And lower rates are providing some support for some rate sensitive sectors," said Paul Bloxham, economist at HSBC, who expects the RBA to remain on hold when it meets next February.
Dylan Eades, economist at Australia and New Zealand Banking Group, agrees the central bank will resist further rate cuts at its next meeting, and possibly throughout the full year, as it evaluates the impact of the recent easing.
In a policy statement following the rate decision the RBA, which has lowered rates by 125 basis points since May, said there are signs that earlier monetary easing is starting to filter through into the economy.
Policymakers will keep a close watch on labor market conditions, and capital expenditure levels in the non-mining sector, said Eades.
"The RBA is more concerned about domestic developments as opposed to international developments – its main focus will be on what happens beyond peak in mining investment in 2013," he said.
Mining investment plays a critical role in Australia's economy, accounting for more than half of the country's growth in gross domestic product (GDP) in 2011. Investment in the sector is expected to peak at close to 8 percent next year.
(Read more: Australia Investment in New Mine Projects at Record High)
Case for a Cut
Shane Oliver, head of investment strategy and chief economist at AMP, disagrees the RBA will hold fire at its next meeting, arguing that lower rates will be needed to boost the non-mining sectors of the economy as the resource boom fades and the Australian dollar remains strong.
Strength in the Australian dollar, which has risen 7.6 percent against the U.S. dollar over the last six months, impedes the competitiveness of the country's exports.
While the RBA has cut the official cash rate back to its post global financial crisis record low, overall policy settings are nowhere near as stimulatory as they were in mid-2009, Oliver noted. Mortgage rates, for example, currently stand around 5.9 percent, compared to 5 percent in 2009, according to data from ANZ.
In addition, unlike 2009, fiscal policy is being tightened as opposed to loosened. This year, the government has announced a range of spending cuts as part of its pledge to deliver a budget surplus next May.
Oliver is not alone is his call for further policy easing in the coming year. Brian Redican, senior economist at Macquarie said he sees "further aggressive rate cuts" in 2013.
"I think the urgency to actually find a replacement for mining investment has become quite acute. It has only been mining investments in the last 12 months that have supported growth. Without that things are looking pretty bad," Redican told Reuters.
