Kenya

At the request of the Central Bank of Kenya (CBK), a technical assistance (TA) mission from the International Monetary Fund’s (IMF) Monetary and Capital Markets (MCM) Department visited Nairobi from April 10 to 17, 2025, to further strengthen the CBK’s Forecasting and Policy Analysis System (FPAS), particularly its core Quarterly Projection Model (QPM) for monetary policy analysis and forecasting. The mission completed a major update of the QPM, improving its ability to capture Kenya’s key macroeconomic characteristics and transmission mechanisms under the flexible inflation-targeting framework. The model was recalibrated, resulting in significantly improved forecasting performance. Key enhancements included the introduction of a fiscal block with explicit modeling of government expenditure and revenue, strengthening the analysis of fiscal developments and fiscal-monetary policy interactions; the disaggregation of inflation into core, food, and energy components using newly developed KNBS-CBK data, allowing for a more detailed assessment of inflation dynamics; and the incorporation of climate risks as supply-side shocks, providing a framework for analyzing the associated monetary policy trade-offs. The climate extension is readily applicable to similar New Keynesian QPMs used in FPAS technical assistance programs in other IMF member countries.