The International Monetary Fund (IMF) has acknowledged progress by the Central Bank of Kenya (CBK) in strengthening its monetary policy framework but warns that persistent data shortages continue to undermine effective policy formulation.
According to a technical assistance report released this week, an IMF mission worked with the CBK to redesign its Quarterly Projection Model (QPM), the central forecasting tool used to guide monetary policy. The updated model is intended to better support Kenya’s inflation-targeting framework and improve the accuracy of economic forecasts.
However, the IMF noted that weak macroeconomic data remains a significant obstacle. It pointed to the limited availability of key indicators such as detailed quarterly GDP data, wage statistics, and long-term inflation expectations. In addition, many of these datasets are released late or undergo substantial revisions, making policy analysis more difficult.
The report also identified institutional challenges that could affect the model’s continued development, including staff turnover and competing operational priorities within the central bank.
The IMF further observed that Kenya’s monetary policy transmission mechanisms remain in transition as changes in financial markets, fiscal policy and global economic conditions continue to influence how policy decisions affect the broader economy.
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Despite these hurdles, the Fund said the revised forecasting model provides a more accurate reflection of Kenya’s economic realities. It incorporates stronger modelling of inflation, fiscal policy and exchange rate movements.
Among the key improvements are separate forecasting equations for core, food and energy inflation, a more comprehensive fiscal component, and an upgraded exchange rate framework that accounts for risk premiums and balance of payments developments.
The mission also introduced an initial climate module, drawing on World Bank data, to assess the impact of weather-related shocks on food prices and the wider economy.
Looking ahead, the IMF plans to conduct a follow-up mission within the next six to twelve months to evaluate how the recommendations have been implemented. The review will assess the use of the revised model in monetary policy decisions, updates to technical documentation, and continued efforts to strengthen the CBK’s forecasting and policy analysis capacity.
