The International Monetary Fund says that the Bank of Canada’s pause in hiking rates is the right move as the economic recovery has slowed and downside risks are increasing.

In a statement following the conclusion of the fund’s staff mission to Canada, the IMF observes that the economic recovery has slowed, as global demand slows, and the Canadian dollar strengthens. “Meanwhile, risks to the outlook are rising,” it says, pointing to stretched household balance sheets in Canada, and housing market fragilities in the United States.

“In this context, Canada faces three main policy challenges: managing the exit toward a neutral macroeconomic policy stance; cementing fiscal stabilization; and incorporating the lessons from the crisis for financial supervision and regulation,” it says.

In terms of monetary policy, the IMF says that the Bank of Canada’s recent decision to keep its policy rate on hold “strikes the right balance between the risks to the outlook and Canada’s relatively advanced expansion”.

Fiscal policy “is appropriately set to shift from expansion to consolidation next year”, it notes, adding that both monetary and fiscal policy have room to respond to downside risks if they materialize.

Looking further down the road to fiscal stabilization, the IMF says that the government’s stance is appropriate. “The plan includes welcome, growth-friendly measures to support Canada’s long-run economic potential, notably infrastructure spending and cuts in the corporate income tax rate. For the longer-run, and as in many advanced countries, restraining growth in health care spending will be an essential ingredient in fiscal stability,” it says.

On the subject of financial sector regulatory reforms, the IMF indicates that Canada is “well positioned” to follow various ongoing international initiatives. “The transition to the Basel III framework of higher capital and liquidity standards should be smooth, given the already high requirements and the sound balance-sheet positions of the banks,” it says, adding that beyond that, policymakers are appropriately focusing on strengthening the infrastructure for over-the-counter derivatives markets, improving their ability to deal with failed financial firms with contingent capital, and calibrating macroprudential tools.

Finally, it says that the move toward national securities regulation is also essential, and that “the steady progress toward this goal is welcome.”

“The creation of a national securities regulator will both bridge potential gaps in the supervision and regulation of what are essentially national markets, and create a venue for bringing securities regulation into the ambit of national coordinating initiatives for promoting financial stability,” it concludes.

IE