The federal government is planning to provide more help to Canadian banks because they continue to cope with unfavourable credit conditions, Prime Minister Stephen Harper said yesterday.

Harper made those remarks prior to a private meeting with key executives from the banking and insurance industries about the global financial crisis. He provided no details, but stressed any additional intervention would not expose taxpayers to any significant cost or risk.

"There has been some improvement in credit conditions but there are still some significant concerns," Harper told reporters following a discussion at the C.D. Howe Institute in Toronto.

"We are not, by any means, finished in terms of further steps that will have to be taken. That said, all the steps that we will take will be done for the wider benefit for Canadians, Canadian jobs, Canadian credit, Canadian economy, Canadian business."

Speculation of further government action has been mounting in recent days. Finance Minister Jim Flaherty has hinted Ottawa could double the size of its mortgage purchase program, while providing other assistance to banks and private pension funds.

The federal government has already agreed to buy as much as $25 billion in residential mortgages from Canadian banks so they can keep lending to consumers. So far, it has purchased about $12 billion of those loans. Ottawa also agreed last month to provide guarantees on more than $200 billion of bank debt.

Harper's comments, however, came just hours after the London interbank offered rate, or Libor, that global banks charge each other for three-month loans in U.S. dollars sank to the lowest level in four years.

The rate slid 12 basis points to 2.39 per cent, the lowest level since November 2004, according to British Bankers' Association data. It was its 19th consecutive decline.

The overnight rate, meanwhile, rose less than 1 basis point to 0.33 per cent. And the Libor-OIS spread – a gauge of cash scarcity among banks – narrowed 11 basis points to 181 basis points.

Separately, the European Central Bank cut interest rates by 50 basis points to 3.25 per cent, while the Bank of England lowered rates by a larger than expected 150 basis points to 3 per cent.

While Harper stressed Canada is in a "relatively strong position" compared with other countries, he conceded "many of the first shock waves of the current global storm were felt right here on Bay Street." Still, he cautioned the global community should only make "selective" changes to regulatory systems going forward.

When it comes to the Canadian economy, Harper again signalled that he is less averse to the idea of running a deficit in future fiscal years, citing "increasing pessimism and uncertainty about the future." He has promised to provide an economic and fiscal update by month's end.

Canada will avoid a recession by the thinnest of margins next year, according to an International Monetary Fund economic update released yesterday.

The IMF said Canada's growth will average just 0.3 per cent next year.

"The real key will be if we are forced into those circumstances that we avoid long-term, permanent, structural deficits. That absolutely must be avoided," Harper said.

With files from the Star's wire services