The Bank of Greece Interim Report on Monetary Policy 2025
22/12/2025 - Press Releases
Today, in accordance with its Statute, the Bank of Greece submitted its Interim Report on Monetary Policy 2025 to the Speaker of the Greek Parliament and to the Cabinet.
Global economy resilient, global trade growing
In 2025, the global economy proved more resilient than expected, despite the imposition of high tariffs by the United States and heightened uncertainty. This year has seen a shift in US trade policy towards a protectionist stance after decades of commitment to free trade; this has given rise to turbulence and acute uncertainty in the international economic environment.
In the first quarter of the year, global economic activity was supported by a frontloading of industrial production and exports by countries other than the Unites States, in response to a sharp increase in import demand ahead of the implementation of higher US tariffs, as well as by a spectacular rise in US investment in artificial intelligence. Subsequently, further support was provided by the easing of uncertainty, as a result of trade agreements concluded between the Unites States and its major trading partners (EU, China, UK).
Global trade also proved more resilient than the pessimistic forecasts of April 2025, confirming the adaptability of international supply chains and the robustness of foreign demand. However, the US weighted average tariff rate, although reduced compared to April, remains at a post-1930s high and, on a bilateral basis, now ranges between 10% and 20% for most countries.
In the euro area, economic activity showed significant fluctuations during the first half of 2025, followed by a marginal acceleration of GDP growth in the third quarter. The easing of uncertainty thanks to the trade agreements has helped strengthen economic confidence and is expected to further support the recovery. The short-term outlook for the euro area economy remains broadly positive. Over the medium term, real GDP is projected to keep growing, supported by rising real incomes due to lower inflation, an expected boost from increased defence and infrastructure spending and the gradual unwinding of the restrictive effects of monetary policy. Inflation is close to the ECB’s target and is set to stabilise at 2% over the medium term, as slowing wage growth, rising productivity and a stronger euro help contain inflationary pressures.
Greek economy: Sustained growth momentum, limited disinflation
Economic activity continued to expand at a satisfactory pace during the first nine months of 2025 (2.0% year-on-year), outperforming the euro area average (1.5%). The main drivers of growth were private consumption and net exports, the latter reflecting an increase in exports of goods and, to a greater extent, of services, alongside a decline in imports. Investment also made a positive contribution to growth, on the back of stronger fixed investment in both productive equipment and construction in the second and third quarters of the year. The labour market continued to show positive developments during the first nine months of 2025, albeit at a slower pace compared with the corresponding period of 2024. Short-term indicators of economic activity and confidence indices point to continued growth momentum for 2025 as a whole.
Headline inflation, as measured by the Harmonised Index of Consumer Prices (HICP), averaged 2.9% in the year to November (2024: 3.0%), driven mainly by persistent services inflation and by unprocessed food inflation, with pronounced fluctuations; it fell markedly in September-October, but returned to its eleven-month average in November. The slight easing of inflation was supported by developments in the components of processed food, non-energy industrial goods and energy.
Fiscal developments: Higher-than-expected primary surplus – Rapid decline in the public debt-to-GDP ratio
Following the milestone year of 2024, when Greece’s overall and primary surplus as a percentage of GDP reached an all-time high, the country’s very strong fiscal performance continued into 2025. Contrary to the initial expectation of a marginal fiscal contraction, fiscal policy is estimated to turn out expansionary in 2025, reflecting the overperformance of the previous year and stronger-than-projected revenue growth. The latter was driven by positive developments in income growth, corporate profitability, employment and tax compliance, while it is also partly linked to the impact of higher-than-expected inflation. This enabled the adoption of a package of permanent expansionary fiscal measures effective from 2026. The estimates of the Introductory Report on the 2026 Budget regarding the 2025 primary balance are consistent with the fiscal projections of the Bank of Greece. According to the Bank of Greece’s estimates, general government debt is expected to decline further in 2025.
Financial developments: Uncertain international financial conditions – Sovereign credit rating upgrades
International financial conditions remain uncertain and vulnerable to shifts in economic policy and political interference with institutions in the United States, as suggested by bouts of volatility in global bond and equity markets. Significant risks also stem from the rapid expansion of the so-called “shadow” financial sector (i.e. non-bank financial institutions) that is not as tightly regulated as commercial banks.
Demand for Greek government bonds by international investors has strengthened markedly, supported by the continued upgrades of the country’s sovereign credit rating, resulting in a substantial increase in investment positions in Greek government securities. At the same time, in the current environment of heightened global uncertainty, these upgrades and increased investment in Greek bonds are estimated to have contained upward pressures on yields arising from developments in other euro area economies, such as France. In line with the sovereign rating upgrades, credit ratings of Greek banks have continued to improve, while yields on bonds issued by non-financial corporations have also declined since the beginning of 2025, benefiting from the country’s improved creditworthiness.
Equities of companies listed on the Athens Exchange have strongly outperformed European and global benchmarks in 2025. The increase of the composite share price index (Athex) since the start of 2025 has been driven mainly by the banking subindex, while all sectors have posted positive returns. A particularly important development supporting Greek equity performance has been the increase in international investment funds’ holdings of Greek shares. The recent proposal by Euronext to fully acquire Athex Group S.A. is anticipated to contribute to a more expanded investor base for equity shares of Greek listed companies, hence to more market-based funding opportunities for Greek firms.
Banking sector: Declining interest rates, rising deposits and lending
Interest rates on time deposits followed a downward trend during the January-October 2025 period, in line with the Eurosystem policy rate cuts. The declines were slightly more pronounced for corporate deposit rates, which had previously recorded larger increases during the monetary policy tightening cycle. Over the first ten months of 2025, private sector deposits grew cumulatively by EUR 3.1 billion, compared with an increase of EUR 0.7 billion in the corresponding period of the previous year, reaching EUR 206 billion in October 2025.
Interest rates on bank loans to non-financial corporations (NFCs) fell significantly during the current year across all loan categories, but more strongly in loans exceeding EUR 250,000, which typically concern larger firms. Household lending rates also declined, though less than in the case of business loans.
The annual growth rate of bank credit to NFCs averaged 16.0% in the January-October period, up from an average of 8.5% one year earlier. Credit to households recorded a smaller contraction overall during the first ten months of 2025, with its annual rate of change turning positive from June 2025 onwards – for the first time since October 2010. This development reflects a further easing of the annual rate of decline in housing loans, which reached zero in October 2025, as well as an acceleration in consumer credit growth to 6.6% in October, further to its strengthening in 2024. The low-interest loans under the Recovery and Resilience Facility (RRF), as well as the co-financing and guarantee programmes of the Hellenic Development Bank and the EIB Group, have greatly contributed – and are expected to continue to do so – to improving the terms and availability of business and housing credit.
Banking system: Strong fundamentals
Greek banks are posting strong fundamentals, with improved profitability and with capital adequacy and liquidity ratios remaining at high levels. The non-performing loans (NPL) ratio declined slightly for the Greek banking sector, further narrowing the gap with the European average. The results of the 2025 EU-wide stress test exercise confirmed the resilience of Greek banks, which, even under the severe macroeconomic scenario, would maintain capital levels comfortably above regulatory requirements and higher than the European average. The strong performance of the Greek banking sector is reflected in the ongoing upgrades of banks’ credit ratings by international rating agencies, a development that is also linked to the strengthening of the macroprudential supervisory framework and the positive effects of sovereign credit rating upgrades. The strengthened resilience of Greek banks creates favourable conditions for them to expand their activities and forge new partnerships with foreign banks and other financial institutions.
Projections
According to the current projections of the Bank of Greece, GDP growth is expected to reach 2.1% in each year from 2025 to 2027, before a marginal slowdown to 2.0% in 2028, exceeding the projected euro area average, thus fostering a further catching-up with European income levels. The main driver of growth is expected to be consumption, while investment and exports should continue to contribute positively. In the short term, investment should be supported by the remaining available RRF resources, as only one-third of these funds has been channeled into the real economy so far. Thus, investment growth is projected at a strong 7.3% in 2025-26, moderating in 2027-28 after the expiry of the NextGenerationEU recovery instrument. The contribution of net trade to GDP is expected to be slightly negative in the near term, due to strong investment activity leading to a rapid increase in imports, as well as to the high import content of domestic consumption and goods exports.
HICP inflation will continue to decline during the forecast period. In 2025, it is expected to remain high at 2.8%, reflecting the persistence of services inflation – primarily due to anticipated increases in wages and property rents, pressures from strong tourist demand and higher indirect taxes on food service and accommodation – as well as unprocessed food inflation. Inflation is forecast to decrease significantly to 2.1% in 2026 and to remain virtually unchanged at 2.2% in 2027, while a one-off acceleration to 2.5% is expected in 2028 as the impact of the new EU Emissions Trading System will become visible in the energy component of the HICP.
Risks and uncertainties
The risks surrounding the Bank of Greece’s growth forecasts are tilted to the downside. Specifically, risks to the medium-term outlook of the Greek economy include: (a) uncertainty from the fragile negotiations to end the Russia-Ukraine war; (b) persistent inflation; (c) potential stronger wage pressures amid labour market tightness; (d) possible natural disasters linked to the effects of the climate crisis; (e) lower-than-expected absorption and utilisation of RRF funds; and (f) slower-than-expected implementation of necessary reforms, which could have adverse effects on the productivity of the Greek economy.
Challenges
Despite the significant progress made in recent years, the Greek economy faces a number of structural challenges that will determine its future path. Overall, the risk of a slowdown in growth rates after the expiry of the RRF, low productivity, the existing investment gap, potential delays in absorbing remaining EU funds, slow changes in the productive model, pressures on the labour market and real incomes, housing affordability issues, the demographic crisis, stagnant structural competitiveness and the very high public debt make up a complex set of challenges.
Policy recommendations
In an environment of heightened uncertainty, trade rivalries and ongoing geopolitical tensions, addressing the above challenges requires a coherent strategy, steadfast commitment to reforms and targeted use of available European resources, so that the current macroeconomic stability can translate into sustainable and inclusive prosperity. In this context, policy recommendations for the Greek economy should simultaneously serve three objectives: (a) strengthening productivity and competitiveness; (b) safeguarding macroeconomic and fiscal stability; and (c) ensuring social cohesion and sustainability over the long term. These considerations also shape the rationale of the proposed interventions, which are not isolated, but mutually reinforcing.
Enhancing labour productivity requires the continuation and deepening of reforms in goods and services markets, more effective public administration, faster delivery of justice, combatting corruption and cutting red tape. These actions improve the business and institutional environment, strengthen structural competitiveness and raise total factor productivity. At the same time, encouraging new productive investments, upgrading workforce skills and leveraging artificial intelligence can, directly and indirectly, deliver labour productivity gains.
Improving the business environment also involves a stable tax system and the provision of targeted incentives (accelerated depreciation and enhanced tax credits for R&D investment), as well as measures to reduce energy costs. Growth-stimulating tax policies complement this framework. Reducing the non-wage labour cost (tax wedge) strengthens incentives for firms to create new jobs.
Boosting investment and exports and rebalancing the productive model towards export-oriented tradable activities crucially hinge on the full and effective use of European financing instruments – the RRF, the Multiannual Financial Frameworks (MFFs) 2021-2027 and 2028-2034, and the EUR 8 billion package for the 2026-32 period (Social Climate Fund, Modernisation Fund and Island Decarbonisation Fund). Given that the NextGenerationEU programme has a finite lifespan, and despite Greece being consistently one of the top absorbers in the EU, the country needs to speed up the implementation of relevant investments so as to maximise its positive impact on growth and productivity in the coming years.
Strengthening and diversifying firms’ funding sources is also critical at a time of volatile international financial conditions. Better functioning of financial markets, utilisation of the new Microfinance Fund and access to alternative forms of market-based financing – especially for start-ups and SMEs lacking sufficient collateral – can unlock significant investment potential. In this regard, it is essential that Greek banks keep up their positive performance and remain on track to meet their medium-term targets, so that they can continue to adequately support the financing of the real economy and achieve further credit rating upgrades, which would act as a shield against an environment of heightened uncertainty.
At the same time, maintaining and enhancing the positive momentum of foreign direct investment – which exceeded EUR 6 billion in 2024, having increased by almost 40% since 2019 – is conditional on stability, institutional credibility and continuation of privatisations and effective utilisation of public property.
The issue of affordable housing calls for additional interventions on the supply side. For example, simplification of procedures is needed at all stages of real estate development – licensing, urban planning and land-use regulations – so as to unlock idle properties and facilitate private and public investment in housing.
In the labour market, wage growth must be consistent with productivity developments in order to avoid excessive increases in unit labour costs that would undermine competitiveness. At the same time, it is necessary to raise labour force participation of women, young people, older workers and pensioners.
Addressing the demographic challenge requires a coherent set of social and development policies: investment in high-quality and affordable childcare facilities; establishment of flexible forms of employment; housing support for young families; and strengthening health and care services. Additional benefits, such as education allowances for children or in-home support for new mothers, would enhance family security. Meanwhile, the integration of migrants and the repatriation of Greeks living abroad can reinforce human capital.
A key condition for implementing all of the above is ensuring the sustainability of public debt and continuing its rapid reduction. Steady compliance with the new EU fiscal framework, combined with the use of high cash buffers – amounting to around 18% of GDP – for the early repayment of bilateral loans under the Greek Loan Facility, can bolster the country’s credibility in financial markets. A faster decline in the debt-to-GDP ratio would lower future fiscal adjustment needs, allow for higher spending ceilings for discretionary policies and reduce exposure to interest rate risk.
Finally, more active participation of the domestic defence industry in international re-armament programmes and joint ventures, through public-private partnerships, can increase the share of its value added in GDP, create high-skilled jobs and cover a larger part of defence needs through domestic production.
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The above policy recommendations constitute a coherent framework for strengthening the resilience and competitiveness of the Greek economy in an environment of heightened international uncertainty and trade protectionism. However, national policies, as critical as they may be, are no longer sufficient on their own. This is why they need to act in synergy with a European strategy along the lines suggested by the Letta and Draghi reports, with a view to removing the remaining barriers to the free movement of goods, services, capital and labour and boosting investment in innovation, infrastructure and strategic technologies so that Europe remains competitive. At the same time, it is also necessary to step up efforts towards completing the banking union and creating a genuine savings and investment union in order to reduce financial fragmentation. Moreover, building on the very successful experience with NextGenerationEU, there is a need to establish a permanent macroeconomic tool to support investment and reforms in the EU. In this context, the launch of a eurobond could act as a catalyst for cross-border investment, strengthen the international role of the euro and enhance Europe’s long-term competitiveness.
The full text of the Report is available (in Greek) here.