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Global financial stability has improved, but risks ahead -IMF

WASHINGTON, Oct 11 (Reuters) - The global economic recovery has strengthened financial stability but easy monetary and financial conditions against a backdrop of sluggish inflation is elevating medium-term risks, the International Monetary Fund said on Wednesday.

The IMF, whose autumn meetings with the World Bank get under way in Washington later this week, also noted risks are rotating from banks, which have fortified their balance sheets, to financial markets as credit spreads compress, volatility declines and asset prices rise.

"While increased risk appetite and search for yield are a welcome and intended consequence of unconventional monetary policy measures...there are risks if these trends extend too far," the IMF said in its biannual global financial stability update.

A prolonged search for yield has raised the sensitivity of the financial system to market and liquidity risks, the Fund said, keeping those risks elevated.

The IMF urged national regulators to consider carefully any proposals that would substantially ease capital, liquidity or prudential standards in "light of their potential to damage the agenda of global regulatory harmonization."

The improvement in near-term financial stability has been underpinned by a broad-based global economic upswing.

On Tuesday, the IMF upgraded its global economic growth forecast for 2017 by 0.1 percentage point to 3.6 percent, and to 3.7 percent for 2018, from its April and July outlook, driven by a pickup in trade, investment, and consumer confidence.

But global central banks have found themselves at different stages in removing monetary policy accommodation, which has been complicated by overall sluggish inflation.

The U.S. Federal Reserve has picked up the pace of interest rate rises since it began a tightening cycle in late 2015, but the European Central Bank and Bank of Japan have yet to move away from negative rates and bond buying.

"Too quick an adjustment in monetary policies could cause unwanted turbulence in financial markets and set back progress toward inflation targets," the IMF said in its report, while keeping rates low for too long may cause a harmful buildup in market and credit risks.

Elsewhere, the Fund warned that leverage in the non-financial sector was now higher than before the financial crisis across the so-called G20 advanced economies as a whole.

Such leverage made households and companies more vulnerable to changes in interest rates and weaker economic activity.

"The key challenge confronting policymakers is to ensure that the buildup of financial vulnerabilities is contained while monetary policy remains supportive of the global recovery," the IMF warned. "Otherwise, rising debt loads and overstretched asset valuations could undermine market confidence in the future, with repercussions that could put global growth at risk."

(Reporting by Lindsay Dunsmuir; Editing by Andrea Ricci)