The International Monetary Fund has warned persistently low inflation is reducing the effectiveness of low interest rates to lift demand and prevent large job losses.
The IMF says given the broad-based nature of disinflation, many central banks are easing monetary policy at the same time, dampening the downward pressure on exchanges rates needed to stimulate their respective economies.
"Monetary policy stimulus on its own may not be sufficient to keep medium -term inflation expectations anchored at central bank targets," the IMF says in early released analytical chapters of its forthcoming World Economic Outlook.
Echoing recent comments of the Reserve Bank of Australia and the Organisation for Economic Co-operation and Development, the IMF says governments must put together comprehensive packages of more growth-friendly fiscal measures.
Addressing a parliamentary hearing last week, newly promoted Reserve Bank governor Philip Lowe said the reason why monetary policy is not working globally is because no one wants to use low interest rates to increase their spending.
In a new agreement with the federal government, the independent central bank kept it's long standing two to three per cent inflation target in place, even though inflation has been below the band since late 2014.
The IMF says globally the main drivers of the decline in inflation has been "persistent economic slack" and softening commodity prices.
"If persistently low inflation leads firms and households to revise down their beliefs about the future path of inflation, it can have negative implications, " the Washington -based institution says.
Eventually, the economy may end up in a "deflation trap" where even if deflation is avoided, a persistent downward shift in inflation would keep interest rates low and provide little room to ease monetary policy further if needed.
"The economy would still not be far from slipping into deflation and, given stickiness in wages, a weakening in demand would be more likely to cause large job losses," it said.
