KUALA LUMPUR, March 26 — Runaway household debt will continue to be a nagging worry for Malaysia’s central bank which said last week that borrowing levels will only start easing when the government builds more cheap houses and improves public transport.

Bank Negara, Malaysia’s central bank, has kept interest rates unchanged since early 2011 but is widely expected lift its benchmark rate by a quarter of a percentage point to 3.25 per cent in the second half of the year.

The increase will add to the burden faced by households at a time when the public is already contending with rising living costs as the government rolls back subsidies on key items, including fuel.

“Although the government says it (household debt) is manageable, we can expect further tightening measures,” said Dr Yeah Kim Leng, chief economist at RAM Holdings Group, an investment research firm.

“Inevitably, we’ll see a slight increase in the debt servicing burden. Although it has a negative impact on borrowers, it helps to dampen loans growth, he told The Malay Mail Online.

Bank Negara said on Wednesday last week that the household borrowing spiralled to 86.6 per cent of the total value of the entire economy in 2013, up from just over 81 per cent in 2012.

The latest increase came even as household lending growth slowed in 2013, growing by 11.7 per cent after increases of 13.5 per cent in both 2012 and 2011.

“We need to moderate it to 10 per cent. Given that a sizable proportion comes from household borrowing for mortgages, we need slower growth in lending for housing,” Yeah said.

Much of the borrowing has been fuelled by cheap money coming in from the US to the fast growing economies of Southeast Asia. The boost its own economy, the US undertook stimulus measures called Quantitative Easing by vastly increasing money supply as far back as 2009.

“Although this level of indebtedness is high, a number of Asean countries have similar high shares given excess liquidity in the region associated with quantitative easing,” said Jayant Menon, a lead economist with the Asian Development Bank through email.

The high level of household debt in Malaysia indicates that consumer spending is vulnerable to an increase in interest rates, he said.

As the US economy grows and the country rolls back its quantitative easing measures, the likelihood of higher interest rates in countries like Malaysia are growing.

A number of economists, including RAM’s Yeah, predict that Bank Negara’s benchmark overnight policy rate will increase by at least 25 basis points in the second half of the year.

Rising prices are also putting pressure on Bank Negara to lift borrowing costs.

At last count, in February, inflation the annual rate of inflation reached 3.5 per cent, a 32-month high.

Yeah also said the central bank may consider raising the amount banks must set aside as statutory reserves.

Such a move will limit the amount of funds that banks have available to lend.

The central bank has already implemented measures to curb borrowing. In July last year, Bank Negara placed caps on the duration of personal loans and mortgages.

Some economists were more sanguine about the outlook for household debt

“If you look at the demographics of the country, we have a young working population and with urbanisation, it is supporting spending,” Alan Tan, chief economist at Affin Investment Bank told The Malay Mail Online.

“With the policies in place and the macro-fundamentals of Malaysia in view of the global economic recovery, the household debt issue will not derail the economic growth momentum,” he said.