The Federal Reserve cut interest rates five times in as many months, but these lower costs aren't being passed along to business borrowers...

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The Federal Reserve cut interest rates five times in as many months, but these lower costs aren’t being passed along to business borrowers.

Despite the Fed’s efforts to ease credit, nearly a third of banks tightened standards for commercial and industrial loans in the last three months of 2007, according to a survey of senior loan officers at 79 banks.

About two-fifths said they raised loan rates, or didn’t lower them, despite their own reduced borrowing costs.

Business growth is tied to availability of credit, which is used for expansion, product development and acquisitions. This allows companies to boost output and create jobs, which the Fed hopes will spur the slowing economy.

“More expensive and less available credit seems likely to continue to be a source of restraint on economic growth,” Federal Reserve Chairman Ben Bernanke told the Senate last week.

For the second straight quarter, the Fed survey showed a greater difference between the rate banks charge businesses for loans and the rate banks pay for the money.

“The tightening in credit availability from banks is a serious concern for the Fed because it is one of the key channels by which easier monetary policy is to be transmitted to the real economy,” writes Merrill Lynch economist David Rosenberg in a report.

As a result, though the Fed cut its target short-term rate to 3 percent, he expects another half-percentage point cut before the central bank’s March 18 meeting and eventual easing to 1 percent.

Demand for commercial and industrial loans declined in the fourth quarter, due to fewer mergers and acquisitions and reduced investment in plants and equipment, according to the banks surveyed.

Citi Investment Research analyst Tobias M. Levkovich says capital investments usually drop in the three quarters after credit becomes harder to come by.

Such declines bode poorly for companies in the materials, energy and equipment, technology and capital-goods sectors, he says.