IMF's Lagarde sees tough policy trade-offs

By Paul Carrel and Krista Hughes

LIMA (Reuters) - International Monetary Fund chief Christine Lagarde urged global policymakers on Thursday to support economic growth while also tackling financial risks stemming from the provision of easy money amid a "rapidly changing and uncertain world."

Lagarde, presenting a Global Policy Agenda at the fund's annual meeting in Peru, said a recovery in the United States was broadly on track and an approaching rise in U.S. interest rates would tighten global funding conditions.

But she added that the slowing of economic activity in China and recent market volatility were having larger-than-expected spillovers across the global economy.

Policymakers could look to the cuisine of Peru for tips on how to draw on a variety of ingredients to update a traditional recipe, in this case for stronger growth.

"My key message to global policymakers is that they need to apply those recipes of Peruvian cuisine: look at the best practices around, and upgrade their policies in order to reinvigorate growth," she told a news conference.

Emerging economies, which have contributed the bulk of world growth in recent years, have been hit hard by a slump in commodity prices.

The IMF cut its global growth forecast to 3.1 percent this year and 3.6 percent in 2016, the second downgrade this year even after central banks in major industrial economies have cut rates to near zero and spent around $7 trillion (£4.6 trillion) in quantitative easing programs in the seven years since the global financial crisis.

Despite these measures, investment, growth and productivity are stuck below pre-crisis levels and there is a lack of consumer demand.

Lagarde acknowledged countries had not always listened to the IMF's call for a three-pronged approach of supporting demand, fostering financial stability and undertaking structural reforms -- with a lot of work to be done still on reforms.

Low interest rates in advanced economies had led to pockets of vulnerability, Lagarde said, adding: "Safeguarding financial stability while promoting real investment remains a major policy challenge."

Despite the risks associated with central banks' provision of cheap money, Lagarde said economic slack and low inflation justified the continuation of such monetary policies in major advanced economies, specifically in the euro zone and Japan.

The IMF has urged to Fed to wait for more signs of recovery before hiking.

"It is clear that central banks have been at the forefront of fighting the great recession and thank goodness they were around to actually carry that effort," she said.

"We believe that in certain regions such as Europe, such as Japan, those monetary policies that have been helpful should be continued because they have not yet reached their target."

Countries which had room to support growth through fiscal spending should do so, she added, pointing to Germany and the Netherlands.

Lagarde and the U.S. Treasury have both previously called on Germany to stimulate its domestic demand to help support its peers, but their message has largely been rebuffed by Berlin.

Turning to emerging economies, Lagarde said their room for policy manoeuvre to support demand is narrowing, with commodity exporters facing a painful adjustment due to rising financial vulnerabilities, low prices for their products, and deteriorating public finances.

Flagging a risk to the world outlook, she said emerging market and developing economies were particularly vulnerable to shifting global tides as they face tighter financing conditions, slowing capital inflows and currency pressures.

"This could create spillovers and spillbacks into advanced economies," she said.

(Reporting by Paul Carrel; Editing by Cynthia Osterman and Chizu Nomiyama)