The $25 billion mortgage program announced Friday by Finance Minister Jim Flaherty is a good step, but more is needed from policymakers, say analaysts at BMO Capital Markets.

In a research note, BMO says that the government’s effort to add liquidity to the Canadian mortgage market, “helps to enhance the long-term funding capacity of our banks at a time when private credit markets have seized up.”

“It would be prudent for the Bank of Canada to consider creating a commercial paper and bankers’ acceptances funding facility, similar to the one announced by the Fed early this week, to provide liquidity for short-term credit markets,” it counsels.

“Businesses and banks finance their short-term credit needs in these markets; in recent weeks, rates have risen and term funding (three month) has all but dried up,” it observes.

BMO admits that the central bank might be reluctant “to take such unprecedented action”, but it says that it would “help to reduce the cost of capital to households and increase its availability.”

Indeed, more policy actions are likely. The firm notes that G7 finance ministers are meeting this weekend, and U.S. Treasury Secretary Henry Paulson is holding a press conference at 18:45 ET tonight to discuss the outcome of today’s meeting. “No doubt it will be a busy weekend, with additional actions taken prior to the market open Asia Sunday night,” BMO says.

In the longer term, after the U.S. election, it foresees a government housing bailout including subsidized loans to creditworthy delinquent homeowners and government purchases and redevelopment of vacant housing; fiscal stimulus, including increased spending for infrastructure, alternative energy, education and health care; and, restructuring of financial market regulation.

Nevertheless, BMO says that the financial crisis will grind economic growth to a halt in many countries. It foresees a longer and deeper recession in the U.S., with at least three quarters of negative growth beginning in Q3 of this year and extending into 2009.

“Canada will not suffer as much, but recession is likely here as well,” it says, as well as in the UK, Europe and Japan.

The long-lasting effect, BMO suggests will mean global growth must be more balanced. “The U.S., the UK and others will deleverage, creating much lower current account deficits while the emerging world must shift focus away from exports to consumption-led growth,” it says. “Without a booming western world, China can only continue to grow rapidly if it steps up consumer spending through rising wage rates and faster development of consumer credit. As well, China will need to tolerate serious appreciation in its currency.”