BERLIN (Reuters) - The International Monetary Fund on Friday raised its growth forecast for Germany, citing soaring domestic demand and rebounding exports, and it repeated its call for Berlin to increase investment and reduce its current account surplus.

The IMF now expects Europe's largest economy to grow by 1.8 percent in 2017 in real terms, compared with its April forecast of 1.6 percent, and by 1.6 percent in 2018, up from 1.5 percent.

"Germany's growth momentum has remained solid, underpinned by robust domestic demand," the IMF said, pointing to rising employment, increased state spending and the European Central Bank's (ECB) continued monetary stimulus.

But it also noted that the ECB's ultra-loose policy was partly to blame for weak profitability in the banking sector.


"Low interest rates, if prolonged, would also negatively affect life insurers given their extensive reliance on guaranteed products," it said.

The IMF predicted German exports growth would gradually recover after shipments abroad slowed last year and said this would push up business investment and imports.

German wage growth has stayed stable and core inflation steady at about 1 percent despite record low unemployment, high job vacancy rates and rising capacity utilization, it said.

Germany's large current account surplus shrunk slightly, to 8.3 percent of gross domestic product (GDP) in 2016 from 8.6 percent in 2015 , mainly due to the deterioration of the income and services balance, the IMF said.

It warned that Germany's aging population and Berlin's slow progress on structural reforms would dampen growth in the medium term, and urged the government to boost potential growth and speed up external rebalancing to help rein in the current account surplus.

"To this end, directors recommended using leeway available within the fiscal rules to further expand public investment in infrastructure, widen the provision of childcare services, foster refugee integration, and reduce the tax burden on labor."

The IMF welcomed signs from German politicians that further reform measures are being mulled.

Heading toward a federal election on Sept. 24, Chancellor Angela Merkel's conservatives and their rival Social Democrats (SPD) both have promised to lower income tax for the middle class and increase investment on digital infrastructure.

Regarding Germany's rapidly aging population, the IMF also recommended raising the effective retirement age above 67, a move which it said would reduce the need to save for retirement and hence push down the current account surplus.

(Reporting by Michael Nienaber; Editing by Michelle Martin and Louise Ireland)

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