ECB rate setters point to another rate cut in Dec.

The chances of another interest rate cut by the European Central Bank increased Friday after some of the bank's governors said borrowing costs may have to fall further to offset a worsening economic outlook and dropping inflation.

The central bank to the 15 countries that use the euro last lowered its rate to 3.25 percent on Nov. 6 in light of diminishing inflation and because of the widening impact of the global financial crisis that has seen many European countries, including Germany, tip into recession.

Speaking at a banking conference in Frankfurt on Friday, Axel Weber said that "owing to a remarkable decline in inflationary pressure in the medium term and rapidly deteriorating economic prospects, euro-area monetary policy in my view has enough leeway for further easing if necessary."

Earlier this week, Lorenzo Bini Smaghi, a member of the ECB's executive board, told the Portuguese newspaper Publico that there "may be more rate cuts depending on the developments." On Friday, in Vienna, Austria, governing council member Ewald Nowotny told reporters that the bank's meeting on Dec. 4 would focus on the latest details as they discussed interest rates.

Most analysts expect the bank to lower its benchmark interest rate to 2.75 percent.

Weber's assessment was reinforced by the latest economic data focusing on purchasing managers' expectations in the EU. The indicator for the manufacturing sector hit a level of 36.2 points this month compared to 41.1 in October, marking a new record low. A figure below 50 denotes contraction in activity.

"The dramatic plunge in leading indicators leaves no doubt whatsoever: the euro zone recession will get worse before it may get better," said Holger Schmieding, Bank of America's chief European economist. "Purchasing managers across the euro zone are now more pessimistic than they have been since the regular surveys of PMI sentiment started some 10 years ago."

ECB President Jean-Claude Trichet, also speaking at the conference, made no mention of rate cuts, but said private banks needed to do their part to get the financial markets to function better.

"The excessive focus on short-term returns has to be addressed," Trichet said in a speech.

"Short-termism can lead to the misjudgement of underlying risk. It can also encourage excessive risk-taking on the basis of relatively small amounts of capital. It is therefore essential to establish the right incentives for market participants, including the use of appropriate internal compensation schemes," he said.

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