The Bank of Greece Report on Monetary Policy 2024-2025
19/06/2025 - Press Releases
Today, in accordance with its Statute, the Bank of Greece submitted its Report on Monetary Policy 2024-2025 to the Speaker of the Greek Parliament and to the Cabinet.
Global economic slowdown amid heightened uncertainty
The global economy is set to slow further in 2025, weighed down by a more restrictive environment for international trade and a sharp increase in uncertainty due to US trade and economic policies, as well as resurgent geopolitical tensions. The announcement of across-the-board “reciprocal” tariffs by the United States in early April 2025 sparked turmoil in international equity and bond markets. In this context, for the first time since the 1970s, investors are increasingly wary of US federal bonds, with a sell-off of positions in such securities and safe haven flights. This is a historic development that indicates reduced investor confidence in US economic policy, reflecting deeper concerns about US macroeconomic stability and fiscal performance. This in itself acts as a catalyst in the international financial system, as the status of US federal bonds as a risk-free benchmark is eroded. At the same time, the euro area recorded net inflows into long-term bonds and the money market, while the euro appreciated, as European securities are seen as a stable and safe investment haven, highlighting a significant opportunity for the European economy, with a potential to strengthen the role of the euro as an international reserve currency.
The euro area economy has shown resilience in early 2025, but the growth outlook is subject to downside risks. The high degree of uncertainty, as a result of deteriorating international trade conditions, heightened geopolitical instability and financial market volatility, is weakening investment incentives and undermining consumer confidence. Despite the challenges stemming from the external environment, euro area economic activity accelerated in the first quarter of 2025, mainly due to a frontloading of investment and exports in anticipation of higher tariffs.
The process of disinflation in the euro area continued in the first five months of 2025. Most measures of underlying inflation suggest that headline inflation, after a temporary fall below target, will settle at around the 2% medium-term target on a sustained basis. Accordingly, the Governing Council of the European Central Bank (ECB) in January, March, April and June reduced the interest rate on the deposit facility by 25 basis points each time.
Greek economy: Maintaining growth momentum despite increasing international uncertainty – Persistence of inflation
Despite the heightened uncertainty, the Greek economy grew by 2.2% in the first quarter of 2025, year-on-year. Growth was mainly driven by private and public consumption and exports of goods, while the contribution of exports of services, investment and imports was negative. At the same time, employment is increasing, the unemployment rate has fallen to single-digit levels, and labour market tightness is easing. Short-term indicators of economic activity in industry, construction and services, despite fluctuations, remain in positive territory. Business expectations remain high compared to the euro area, in contrast with consumer confidence that seems to be affected by developments in the international environment.
Headline inflation shows signs of persistence, which delays its decline relative to inflation for the euro area as a whole. Headline inflation remained close to 3% in the first five months of 2025, but rose to 3.3% in May (compared to 1.9% in the euro area), chiefly due to increases in the prices of food and non-energy industrial goods. The persistence of services inflation, due to wage growth, indirect taxes (on food and accommodation services) and high, mainly foreign, demand (tourism), prevents its rapid de-escalation.
Fiscal developments: Efforts to tackle tax evasion led to sustainable overperformance of public revenues – Large decline in the public debt-to-GDP ratio
In 2024, the general government budget balance, for the first time since 2019, turned from a deficit of 1.4% of GDP in 2023 to a surplus of 1.3% of GDP. The primary balance of general government was a surplus of 4.8% of GDP, significantly exceeding the Budget forecast. This performance marks a historic milestone for fiscal data of at least the last thirty years. Moreover, Greece achieved the largest debt reduction as a percentage of GDP among European Union (EU) Member States, with its debt ratio falling sharply by 10.3 percentage points to 153.6% of GDP. The better-than-projected fiscal outcomes in 2024 were due to the overperformance of tax revenues against the targets, as well as the containment of primary expenditure. The factors behind the overperformance against fiscal targets for 2024 are sustainable, which created a larger fiscal space and allowed the adoption of new permanent fiscal measures starting from 2025.
Financial developments: Positive domestic developments act as a bulwark against increased international uncertainty
In 2025, Greek government bond yields have followed developments in yields on other euro area government bonds. Thus, they increased in mid-March, under the upward impact of rising German bond yields. However, during the April turmoil in international markets, they declined closely in line with those of other euro area government bonds. Greek bank and other corporate bond yields continued to decline despite the April turmoil. These positive developments are being underpinned by the ongoing upgrades of the Greek government’s credit rating. In conjunction with the upgrades of the sovereign credit rating, the credit ratings of Greek banks continued to be upgraded. Thus, it becomes clear that positive domestic developments act as a bulwark against the heightened uncertainty prevailing in the international financial environment.
Stock prices in the Athens Exchange broadly followed international developments, continuing their upward trend in early 2025, while the significant decline they recorded in early April, amid the international market turmoil, was largely reversed subsequently. At a sectoral level, the positive performance of the general index since early 2025 was driven by the shares of Greek banks, while most sectoral indices showed gains.
Banking sector: Decline in deposits, reduction in lending rates and increase in loans
Interest rates on time deposits continued to decline in line with the Eurosystem’s policy rate cuts, while rates on overnight deposits (current, sight and savings accounts) remained broadly unchanged. The reduction in household time deposit rates was more moderate, to discourage shifts of savings to alternative investments.
After an overall annual increase of €8.6 billion in 2024, in the first four months of 2025 the stock of private sector deposits fell by a cumulative €4.9 billion to stand at €198.4 billion in April 2025. The low level of deposit rates (both in nominal and in real terms) encouraged a significant shift of funds to other savings options that offer better returns.
The cost of bank borrowing for businesses and households has generally declined this year, in line with the Eurosystem’s monetary policy stance. The cost of bank borrowing for businesses has declined somewhat more, as the majority of new loans carried a floating rate or a rate fixed for up to one year. For households, the pass-through of policy rate cuts into bank lending rates has been more limited than for businesses, as a larger share of new loans had a fixed interest rate.
In April 2025, the year-on-year growth rate of credit to non-financial corporations (NFCs) reached the highest level (17.2%) observed since early 2009. The provision of business credit was supported by the co-financing and guarantee instruments of development agencies, as well as by bank loans co-financing investment projects under the Recovery and Resilience Facility (RRF).
The growth rate of consumer loans in the first four months of 2025 slowed down slightly. On the other hand, the rate of contraction in housing loans was weaker. Demand for housing loans has been strengthened by lower (year-on-year) mortgage rates, as well by rising house prices. The “My Home II” and “Upgrade My Home” programmes also support the supply of housing loans by domestic banks.
Banking system: Improved fundamentals and credit rating upgrades of banks
In 2024 and the first quarter of 2025, the upgrades of banks’ credit ratings continued, reflecting their improved fundamentals, a strengthening of the macroprudential policy framework and the positive effects of the sovereign credit rating upgrades. In the first quarter of 2025, the profitability of Greek banks increased year-on-year, mainly driven by higher fee and commission income and lower loan loss provisioning. Data for the first quarter of 2025 indicate continued improvements in Greek banks’ capital adequacy ratios and loan portfolio quality, with liquidity ratios remaining at high levels.
Projections
According to the current projections of the Bank of Greece, the GDP growth rate is expected to be 2.3% in 2025, before declining to 2.0% in 2026 and accelerating marginally to 2.1% in 2027. These growth rates are higher than the euro area average, contributing to the gradual convergence of Greece’s real GDP per capita towards the EU average. The main driver of growth is expected to be consumption, while investment and exports will continue to make positive contributions. The direct impact on Greece’s GDP from the imposition of tariffs is estimated to be limited, as the United States is not a significant market for Greek exports of goods, representing a share of less than 5% of total exports in 2024. The impact on Greece will be mainly indirect, primarily through lower euro area foreign demand and, secondarily, higher uncertainty.
Inflation based on the Harmonised Index of Consumer Prices (HICP) will continue to decline in the three years ahead. In 2025, it is projected to turn out at 2.5%, reflecting persistently high services inflation, mainly due to expected increases in wages and rental prices and pressures from high tourism demand. Core inflation will remain high, well above the euro area average, partly reflecting the Greek economy’s positive output gap. However, it is expected to decline markedly to 2.2% by 2027, driven down by falling non-energy industrial goods inflation.
Risks and uncertainties
The risks surrounding the Bank of Greece’s growth forecasts are predominantly on the downside. In more detail, risks to the short-term outlook for the Greek economy include: (a) a further rise in trade protectionism and a stronger-than-expected slowdown in the euro area economy; (b) stronger negative effects on the global economic environment, financial conditions and the energy market from widespread uncertainty and growing geopolitical tensions; (c) a tighter labour market and potential higher wage pressures; (d) potential natural disasters associated with the impacts of the climate crisis; (e) a lower-than-expected rate of absorption and utilisation of RRF funds; and (f) a slower-than-expected implementation of the necessary reforms, with adverse implications for the productivity of the Greek economy.
Challenges
Despite the remarkable achievements and the resilience that the Greek economy has demonstrated in recent years, several obstacles and challenges remain, which hold back Greece’s growth potential. The domestic business environment is hampered by a relatively burdensome and frequently changing regulatory and administrative framework that lacks transparency and by a legal system that is not considered sufficiently effective and protective of property rights. Regulatory barriers, shadow economy and limited access to finance, especially for small and medium-sized enterprises, still hinder competition, private investment and productivity growth. Skills mismatches, low educational outcomes, a gap in basic skills and a lack of appropriate incentives continue to discourage people from seeking work and obstruct innovation.
Policy recommendations
To address the challenges related to domestic structural weaknesses, as well as the uncertainties stemming from the global economic environment, and to ensure the stability and resilience of the Greek economy, the following reforms and policy interventions are proposed.
Safeguarding public debt sustainability must remain a priority for fiscal policy. In this regard, compliance with European fiscal rules is crucial. Meanwhile, the intended early repayment of the remaining amount of GLF loans, using cash reserves, will help achieve a faster public debt decline compared with the current medium-term target, lead to a significant reduction in future gross financing needs, limit debt servicing costs and enhance debt sustainability.
On the other hand, fiscal reforms are also needed to make fiscal policy more growth-friendly. Priorities in this area include reforms to the tax system towards higher effectiveness and social fairness, along with reforms to enhance the quality and efficiency of public spending.
The timely absorption and disbursement of RRF resources to the private sector is key to achieving the projected investment growth rates in 2025-2026. The effective use of EU funds will help accelerate the green and digital transitions, which will strengthen the medium-term growth rate of the Greek economy.
At the same time, additional efforts are needed to improve the business environment and to support the transition to a medium- and high-tech economy. A key priority is productivity-enhancing reforms, such as simplifying business regulations, deepening domestic credit and capital markets, strengthening innovation and improving government efficiency.
Reforms aimed at simplifying the regulatory framework for businesses could include actions to cut red tape, reduce barriers to market entry and exit, improve spatial planning and simplify land use processes. Reforms to foster innovation, research and development (R&D) and digitalisation should focus on providing targeted tax incentives for R&D, increasing public funding for R&D, promoting digital transformation across the public and private sectors and expanding the use of artificial intelligence. Linking research with businesses, especially industry, is instrumental in generating innovation. With a view to improving government efficiency, key priorities involve strengthening infrastructures and the rule of law, as well as speeding up the delivery of justice.
In addition, an effective financial intermediation system is key to the mobilisation of domestic and foreign savings and contributes to a more efficient allocation of credit resources, helping to increase investment. This requires further improvements in bank asset quality, avoiding new net inflows of non-performing loans. Also important is the diversification of financing sources, through the newly established Microfinance Fund, as well as through access to market-based financing as an alternative to bank credit.
A well-functioning labour market and a larger and better-educated workforce can directly increase not only output through higher labour input, but also productivity, through a faster reallocation of employment to growing industries and firms, enabling them to better exploit new technological opportunities. The main priorities concern the upgrading of human capital by improving the education system and redesigning and expanding training programmes for the unemployed; the provision of incentives for labour force participation, primarily of women, youth, but also older workers; a reversal of the brain drain; and the attraction and integration of foreign workers, especially those with valuable skills.
Given that domestic savings are not sufficient to cover the required investment, it is necessary to continue attracting foreign direct investment (FDI). A strong impetus to FDI flows could come from the faster implementation of the privatisation and public property development programme. Above all, however, a key prerequisite for achieving higher investment is the maintenance of macroeconomic, fiscal and political stability.
Boosting investment in the longer term also requires an increase in private sector saving. Strengthening the third pillar of the pension system, namely private insurance, as well as promoting financial literacy could help in this direction.
Finally, given Greece’s dependence on fossil fuels, there is an urgent need for more investment in renewable energy sources and upgrades to the electricity grid. In the same vein, additional actions are needed to reduce energy costs, such as strengthening energy interconnections with neighbouring countries, increasing the capacity of electricity networks and reviewing regulated charges on energy bills and high energy taxation.
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The global economic environment is increasingly uncertain, with growing challenges, continuous upheavals and heightened geopolitical tensions. In this context, the EU should remain united, strengthen coordination among its Member States and deepen economic cooperation and integration. The recent EU initiatives to enhance defence capabilities (ReArm Europe Plan/Readiness 2030) and stimulate investments in infrastructure and critical new technologies (the European Commission’s Competitiveness Compass and Clean Industry Pact) represent a fundamental shift in EU policymaking, contributing to a deeper Single Market, and can provide a huge boost to the European economy, increasing its flexibility and resilience to external shocks. Meanwhile, the completion of the banking union in areas related to crisis management and the establishment of a European deposit insurance scheme, as well as the creation of a European savings and investment union, will ensure economies of scale and streamline the flow of investments across the EU. At the same time, however, we can build on the successful experience with the NextGenerationEU recovery instrument to offer a common safe asset in euro (Eurobond) on a permanent basis. The above actions will strengthen the European economy and enhance the international role of the euro as an alternative reserve currency.
The full text of the Report is available (in Greek) here.