The International Monetary Fund (IMF) has recommended that Kenya change its monetary policy review calendar to enhance economic forecast. In particular, the IMF calls for a decrease in the Central Bank of Kenya’s meetings from six to four annually.
The IMF’s latest assessment pointed out that the programme is overly demanding on the research and forecasting staff of the central bank. Comprehensive economic forecasting, data analysis, and policy evaluation is a rigorous process that takes time to produce reliable results and must be conducted at each meeting in order to produce results.
Aligning Monetary Policy with Quarterly Economic Data
In Kenya, the most important economic information, such as the Quarterly National Accounts, is now available four times a year. The Monetary Policy Committee meets six times each year; consequently, there is a natural timing gap.
This mismatch makes that some meetings of the policy at the national level are held without the latest national statistics. Economists then have to work under the tight, compressed deadlines to update the models. This pressure can have a significant impact on the quality and depth of analysis for interest rate decisions, the IMF cautions.
The IMF indicates that a typical correct central bank with a policy framework of ‘inflation targeting’ takes 5 to 7 weeks for full forecasting and forming a policy. These timeframes provide analysts with the room they require to try out scenarios, include new information and tweak their growth projections.
The Central Bank of Kenya (CBK) would thus cut down its meetings to four times a year, fitting in with the quarterly data releases. The economists would then have time to examine carefully the economic risks, exchange rate changes, and the fiscal situation in the world without running into each other’s rear ends in time.
In the future, the IMF proposed a longer process of reform by an increase in meetings from six to eight per year by the CBK. The four additional sessions would, however, serve as an interim session with the aim of determining short-term indicators and ‘nowcasts’ and not as a full forecasting round. In such a hybrid model, the technical teams would not be overwhelmed by sudden changes in the economic landscape and would be able to respond quickly.
Last but not least, the IMF highlighted the importance of improving the communication of policy changes. The Fund suggests that the public be adequately explained in major policy decisions, followed by press conferences by the CBK Governor and detailed Monetary Policy Reports.
