Instability in the euro zone, and its impact on global markets and commodity prices, encouraged the central bank to cut the cash rate again, earlier in June.
In the minutes of its June 5 meeting, released on Tuesday, the Reserve Bank of Australia (RBA) nominated developments in Europe as the main reason for reducing the official rate by 25 basis points to 3.5 per cent.
"Developments in the euro area over the past month had increased the probability of a sharp deterioration in economic conditions in response to ongoing concerns about the sustainability of sovereign debt obligations and stability of banking systems in the periphery of the region," the RBA said.
This referred to the instability of Spain's banking system, which had requested a bailout, and the continuing concern about the Greek economy ahead of a crucial election held on the weekend.
Growing concerns about the euro zone's future justified an easing bias, the RBA said.
"There was clear evidence suggesting a softening in global conditions, and uncertainty about the future of Europe had increased significantly," it said.
"While spillovers had been limited thus far, there was a reasonable likelihood that the tendency towards precautionary behaviour both at home and abroad would intensify."
This, plus an expectation for low inflation, meant there had been more scope for a further cash rate cut, although the RBA said the case for and against further easing in June was finely balanced.
The RBA acknowledged that Australia had felt the effects of Europe's problems through its currency and commodity markets.
"Weaker global prospects had led to lower commodity prices, which, combined with a reduction in the global appetite for risk, had led to a depreciation of the Australian dollar," it said.
The RBA was also watching growth in China, which was slowing, and in the US, where a moderate recovery was underway.
Against this backdrop, the Australian economy continued to show mixed conditions, with strength mainly coming from mining and related industries.
"Data on retail sales, the labour market, mining investment and business credit were consistent with a degree of resilience in the domestic economy," it said.
" ... business confidence had weakened in non-mining sectors, along with indicators of activity in the construction industry."
Domestic data released in the days following the RBA's June meeting showed a strengthening in both the labour market and economic growth as a whole.
