The Bank for International Settlements (BIS) has warned that ultra-low interest rates have lulled governments and markets “into a false sense of security”.
The Basel-based organisation – usually dubbed the “central banks’ central bank” – urged policy makers to begin to normalise rates.
“The risk of normalising too late and too gradually should not be underestimated,” the BIS said.
Markets have rallied since January.
The FTSE all-world share index is up 5% so far this year, while the Vix, a measure of implied US market volatility known as the “fear index” , is at a seven-year low.
“Overall, it is hard to avoid the sense of a puzzling disconnect between the markets’ buoyancy and underlying economic developments globally,” the BIS said in its annual report.
It said that low interest rates had helped increase demand for higher risk investments on stock markets as well as in property and corporate bonds markets.
The BIS doesn’t set policy but serves as a forum for central bankers to exchange views on relevant topics from the global economy to financial markets.
While global growth has improved, the BIS said it was still below its pre-crisis levels.
“Growth has disappointed even as financial markets have roared: The transmission chain seems to be badly impaired,” the BIS said.
It said policy makers should take advantage of the current upturn in the global economy to reduce the emphasis on monetary stimulus.