St. George expects uncertainty in Europe to prompt the Reserve Bank to deliver borrowers a 0.25% rate cut when it meets next in early February bringing the cash rate firmly into expansionary territory at 4%.
The bank's chief economist Besa Deda said in an investor note that there are likely to be two cuts in 2012 but that external factors would play a large part in determining what the RBA would do.
"Ultimately, how much cutting the RBA does in this easing cycle will depend significantly on European developments," Deda stated. "The deeper the European crisis, the more easing the RBA might need to do."
However, Deda believes the RBA will likely limit its intervention to two rate cuts in 2012 on the back recent improvement in US economic data offsetting some of the worries about the global economy stemming from Europe.
Financial markets, on the other hand, are forecasting a cash rate of 3.5% by mid-2012. This would imply that they are expecting the trouble in Europe to spread prompting the RBA to bring rates nearly as low as they were during the depths of the GFC when the cash rate was briefly at 3%.