The State Bank of Pakistan (SBP) announced on Monday that it had decided to cut the interest rate by 150 basis points (bps) to 20.5 per cent.

The decision to cut the key rate to 20.5pc comes ahead of the annual budget and a week after data showed inflation slowed to a 30-month low of 11.8pc in May.

In a statement, the SBP said the central bank’s Monetary Policy Committee (MPC) had met earlier today and reviewed the current economic developments, highlighting “better than anticipated” decline in inflation for May.

Regarding the decision, the committee noted that “underlying inflationary pressures are also subsiding amidst tight monetary policy stance, supported by fiscal consolidation”.

At the same time, the MPC highlighted “some upside risks to the near-term inflation outlook associated with the upcoming budgetary measures and uncertainty regarding future energy price adjustments”.

Regarding the key developments, the committee said that real GDP growth remained moderate at 2.4pc “with subdued recovery in industry and services partially offsetting the strong growth in agriculture”.

“Second, reduction in the current account deficit has helped improve the foreign exchange (FX) reserves to around $9 billion despite large debt repayments and weak official inflows,” it added.

The SBP noted that “the real interest rate still remains significantly positive, which is important to continue guiding inflation to the medium-term target of 5–7pc”.

“The government has also approached the IMF for an Extended Fund Facility programme, which is likely to unlock financial inflows that will help in further build-up of FX buffers,” it said.

The decision for a rate cut comes in defying expectations. In a Topline Security survey, 43pc of participants expected the policy rate to decline by 100bps. While in a Bloomberg survey, 63pc of the participants expected a 100bps decline in key rate.