Banks bellwether for credit-crunch fortunes

Just how bad is the sub-prime crisis? A clearer picture is set to emerge this week as four of the world’s leading investment banks: Morgan Stanley, Goldman Sachs, Lehman Brothers and Bear Stearns, report quarterly profits.

And concerns that the credit crunch will push the cost of borrowing higher for businesses and consumers are growing, as experts warn that the credit crisis is pushing up benchmark interest rates in short-term money markets.

Last week the benchmark 90 day bank bill rate, that banks use to determine loan rates, reached a decade high of 7.1%. This is also affecting the price of long-term debt. The rising costs of borrowing for the banks is expected to result in them charging higher prices for the money they lend. And experts in the US warn that sharemarket investors are underestimating the risks to corporate profits and the broader economy from the woes in the debt market, according to The Australian Financial Review.

Meanwhile expectations are growing that the Federal Reserve will cut US interest rates on Tuesday after weak retail sales heightened concerns that the impact of the credit crunch and weak housing market were spreading throughout the US economy. It will be the first cut in US rates for four years. And while it is expected to be about 25 basis points, to 5%, some believe a fillip of 50 points is needed to inject confidence back into the slowing economy.

In China however interest rates rose on Friday for the fifth time in a year in an attempt to keep inflation in check as the economy continues to expand at above-target rates.