The International Monetary Fund (IMF) is supportive of Canada’s current monetary policy stance, and endorses the federal government’s new stimulative approach to fiscal policy, but says that there are still reforms needed to stoke productivity and financial sector stability.
Both the Bank of Canada and the federal government are on the tight track with their respective monetary and fiscal policy approaches, the IMF concludes in a statement outlining the results of its latest official review of Canada published on Monday.
“Monetary policy should stay accommodative, and further easing should be considered if the economy falters,” the IMF says. “It should not, however, solely bear the burden of supporting the economy given potential financial stability risks associated with a low interest rate environment.”
Indeed, fiscal policy should also do its part to support economic growth, the Washington D.C.-based organization says. “The federal government has fiscal space and its plans to increase infrastructure spending in the 2016 budget are appropriate,” the IMF statement says, adding that there may be room to expand spending further if the economy stumbles.
The Canadian economy is set for a modest recovery, the IMF forecasts. It projects GDP growth of 1.75% in 2016, rising to 2.25% in 2017. Overall, the risks to that outlook are tilted to the downside, the IFM warns, with oil prices, global growth, and the Canadian housing market representing key risks. There is also upside potential to the medium-term outlook, it adds, if a better-than-expected recovery in exports were to materialize.
As for concerns about the housing market, “additional macroprudential measures may be needed” if vulnerabilities in the housing market intensify, the IMF statement says. And it stresses there should be more effort directed at structural reforms to boost productivity and external competitiveness.
The IMF statement also suggests that banking regulators consider introducing a cap on loan-to-income ratios to “address regional imbalances”. As well, it recommends that regulators more actively monitor the Canadian banks’ evolving role in the Caribbean region amid rising concerns about regulatory compliance costs, anti-money laundering standards and offshore tax evasion and avoidance.
In terms of regulatory reform, the IMF statement calls the effort to create a co-operative securities regulator among the federal government and several provinces “a bold step toward enhancing the cooperation between federal and provincial regulators.” However, it says that the authorities have yet to take action on a number of other financial sector policy recommendations, including ensuring that there’s a regulator with a clear mandate “to monitor systemic risk to facilitate macro-prudential oversight and carry out system-wide crisis preparedness.”
Federal banking regulators should be given sole decision-making authority on prudential criteria, without the risk of political interference, according to the IMF statement. “While this has not been a problem in practice, ministerial power to override supervisory judgment impinges on operational independence, which is a critical input to supervisory effectiveness,” it says.
The IMF report also says that “the timing is right for a renewed push on structural reforms to raise Canada’s productivity growth”, including measures to promote innovation and investment.
Photo copyright: vintom/123RF