After months of deliberations, the Iranian Money and Credit Council lowered bank interest rates in early May.

According to the Central Bank of Iran (CBI), the maximum interest rate that banks can offer on one-year savings will be 20% as opposed to the previous 22%. CBI Gov. Valiollah Seif said the council aimed to create a scenario in which interest on savings would be higher than inflation, while loans would be less expensive for industry. In other words, there is a desire to make loans extended by banks and financial institutions more affordable, thereby helping the country’s industrial sector create more jobs and generate economic momentum.

The decision is also designed to ease the inflationary impact of bank interest on the economy. Having succeeded in reducing the inflation rate from a peak of 42% in mid-2013 to about 15% last month, and also having contained rapid liquidity growth in the market — the country’s money supply grew by about 29% in 2013, but only 15% in 2014 — the government and CBI have now seen fit to reduce interest rates. Nonetheless, Seif said the decision will be revisited every three months by the Money and Credit Council. Should inflation fall further, one can expect that interest rates to be lowered again to ease inflationary pressures.

While the decision seems rational given Iran’s current economic conditions, the real question is whether the gradual reduction in interest rates will benefit the economy. First and foremost, any intervention of this kind could potentially backfire in an economy with substantial structural deficiencies. The most recent such occurrence was in 2007, when President Mahmoud Ahmadinejad approved reducing interest rates to 12% (for state banks) and 13% (for private banks) from 20%. Consequently, law-abiding banks were weakened, non-licensed financial transactions grew, and banks were compelled to create a gray market in which loans were traded, leading to a situation where cheaper loans were only extended to networks of power that then used these facilities to engage in shady business activities. The original objectives of reducing the cost of capital and containing inflation were totally missed, resolution of the standoff between parliament and the government over readjusting interest rates was assigned to the Expediency Council, and in 2012 the government officially increased bank interest to 21%.