KUALA LUMPUR, July 11 — Bank Negara Malaysia’s (BNM) recent tough stand on easy loans is an unpopular but necessary move to stop households from sinking deep into debt when interest rates shoot up, two economists have said.

Malaysia has so far been insulated from the effects of the global financial crisis that has submerged other countries, buoyed by the government’s stimulus measures including granting credit on tap. But those days are over as interest rates are set to rise.

“We have stimulated the economy with domestic demand. That situation is no longer ideal,” economist Dr Zakariah Abdul Rashid told The Malay Mail Online here.

The executive director of the Malaysian Institute of Economic Research (MIER) explained that at this point of time, any move to stimulate growth must be balanced with steps to counter the inevitable inflation of interest.

Since the 2008 global economic crisis, Malaysia’s growth has been primarily driven by strong domestic demand.

In the first quarter of 2013, domestic demand rose 8.2 per cent year-on-year compared to 7.8 per cent in the previous quarter.

As Malaysia’s inflation rate reached 1.8 per cent in May this year — the highest in 12 months — economists have warned that domestic demand is showing signs of fatigue.

“In a less than encouraging economy and increasing inflation rate, BNM might be forced to take action by increasing its OPR,” Zakariah said, referring to the overnight policy rate, a benchmark rate set by the central bank.

The OPR has stayed at three per cent since March 2011 but any change will affect other rates, such as the base lending rate (BLR) and foreign exchange rate.

“We cannot always assume that interest rates will always stay at this level,” said Lee Heng Guie, chief economist for CIMB, Malaysia’s second largest lender.

He said the current rate is still “quite accommodative”, but added that CIMB predicts the rate will start to move next year by around 25 basis points.

According to Lee, suppressing interest rates for too long is also risky as Malaysians will be more likely to take more risks by wading into ventures in search of higher returns.

Both economists agreed that if the central bank had not stepped in to turn the screws on lending, more households would indubitably end up in a vulnerable position as they will find it harder to service their debts due to the impending interest rate spike.

Last week, BNM introduced three new measures to curb Malaysia’s rising household debt which currently stands at 83 per cent of the GDP according to Finance Minister II Datuk Seri Ahmad Husni Hanadzlah.

The measures include reducing the maximum tenure for personal loans to 10 years, and 35 years for house loans. Offers for pre-approved personal loans have also been prohibited.

BNM governor Tan Sri Dr Zeti Akhtar Aziz has said that housing loans make up the bulk of Malaysia’s household debt at 44.5 per cent, while 16.8 per cent are personal loans.

Lawmakers from both sides of the political aisle have lauded the central bank’s measures.

PKR strategy director Rafizi Ramli has expressed his concern against Putrajaya tightening the credit without increasing wages and reducing household costs, which will cushion any economic consequences.

“It will have an impact on the lower middle class and civil servants. These are the people who resort to loans ... You’ll end up with higher bankruptcies,” Rafizi told The Malay Mail Online.

Lee however disagreed on the impact, saying that only new borrowers after July 5 will be affected.

He also claimed that the measures are targeted exactly towards those who have to resort to loans, in order to curb further unhealthy borrowing culture.

“If history is any guide, over-leveraging supported by cheap credit will increase the household sector’s vulnerability to unemployment, income reduction, or interest rate increase,” the CIMB economist said.

The DAP’s national publicity chief Tony Pua also lauded BNM’s action, calling it “a move in the right direction” to prevent the abuse of loopholes in financial institutions, and to prevent people from falling more into debt.

“It’s a positive move... a move that should have been made years ago when household debt reached 80 per cent of GDP,” said Pua, referring to the gross domestic product.

Johor Baru MP Tan Sri Shahrir Samad has said that BNM’s rules would affect consumer spending, but stressed that “too easy” lending could result in bankruptcy.

“There’ll be some decline, some impact on the economy, but the downside is even worse ... The days of easy debt are not good for the economy,” the Barisan Nasional Backbenchers Club (BNBBC) chairman told reporters in Parliament this week.