The International Monetary Fund (IMF) has directed the Central Bank of Kenya (CBK) to adopt a new economic model that also includes government spending and climate-related risks to determine interest rates.

🇰🇪 Breaking It Down

The recommendation follows the completion of an assessment of the Central Bank's Quarterly Projection Model (QPM) used in monetary policy decisions to determine base lending rates.

According to the lender, the new model will greatly improve the regulator's ability to accurately forecast inflation, economic growth, exchange rates and climate-related risks compared to the previous version.

"We reviewed the model’s historical fit, assessing how well past economic shocks are captured. The evaluation shows that the performance of the new model is far superior to that of the old model," the IMF disclosed.

📌 What You Need to Know

The recommended changes come as Kenya faces economic uncertainty driven by extreme weather events , fiscal pressures, and continuously changing global trade policies.

The Bretton Woods Institution noted that the updated model will help the CBK make more informed monetary policy decisions and improve its ability to keep inflation close to its 5 per cent target.

Under climate-related shocks, the IMF stated that droughts and poor rainfall can significantly increase food prices, pushing up overall inflation and potentially forcing the CBK to hike interest rates.

The IMF's new model also places greater emphasis on the government's spending, unlike previous central bank versions that focused largely on budget deficits.

The revised model directly measures how government expenditure affects demand, inflation, and economic activity, providing policymakers with a clearer picture of the country's fiscal status.

It further introduced new tools to separately track food and energy inflation, allowing for more detailed analysis of the factors driving changes in the cost of living.

📰 Source: Kenyans.co.ke