The Bank for International Settlements says policymakers are too focused on short-term results. Pictured: The headquarters of the European Central Bank is pictured in Frankfurt, Germany, June 28, 2015. Reuters/Ralph Orlowski

The Bank for International Settlements said Sunday low interest rates could become the new normal in developed economies as the result of a broad malaise in the global economy, unbalanced economic expansion, low productivity, and too high debt burdens and financial risks. The annual BIS report also said governments are short-sighted, ignoring slower-moving and more costly financial booms and busts in favor of immediate gains.

"Interest rates have never been so low for so long," the report said. "They are low in nominal and real [inflation-adjusted] terms and low against any benchmark. … Yet, exceptional as this situation may be, many expect it to continue. There is something deeply troubling when the unthinkable threatens to become routine."

The report said the economic malaise may be the result of a misunderstanding of how financial developments impact output and inflation on a global basis. Rather than serving as an impetus to global expansion, low interest rates reflect the current weakness and may be contributing to financial booms and busts.

"The result is too much debt, too little growth and excessively low rates. In short, low rates beget lower rates," the report said.

The economic malaise has contributed to the financial crisis in Greece. Pictured: A woman talks to a bank employee outside a National Bank branch in Athens, Greece June 28, 2015. Reuters/Marko Djurica

To fix the situation, the report said, greater attention must be paid to slower-moving financial cycles rather than near-term output and inflation. Additionally, solutions must be country specific.

"The aim is to replace the debt-fueled growth model that has acted as a political and social substitute for productivity-enhancing reforms. The dividend from lower oil prices provides an opportunity that should not be missed. Monetary policy, overburdened for far too long, must be part of the answer, but it cannot be the whole answer," the report said.

The report noted output growth is not far from historical averages now, and advanced economies are gaining momentum though economies overall are little changed from last year. But there is little risk-taking in "the real economy" while aggressive risk-taking is evident in financial markets.

"The economic developments that really matter now take much longer to unfold. Meanwhile, the decision horizons of policymakers and market participants have shortened," the report concluded. "Financial markets have compressed reaction times and policymakers have chased financial markets more and more closely in what has become an ever tighter, self-referential, relationship. Ultimately, it is this combination of slowing economic time and shorter decision horizons that helps explain where we are -- and how, before we know it, the unthinkable can become routine. It should not be allowed to."