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Bank of Greece Monetary Policy Report 2021-2022

30/06/2022 - Press Releases

Today, in accordance with its Statute, the Bank of Greece submitted its Monetary Policy Report 2021-2022 to the Speaker of the Greek Parliament and the Cabinet.

Deterioration in the international economic environment is causing uncertainty in the Greek economy
Russia’s invasion of Ukraine has undermined global security and stability and abruptly changed the international economic environment and outlook. Before the war in Ukraine, the global economy was dynamically recovering from the impact of the pandemic and the resulting disruptions of global supply chains. Today, it is faced with a double shock: on the one hand, a further rise in inflation, driven by energy, food and metal commodity prices, and, on the other, the risk of a major slowdown in economic activity or even recession amid heightened uncertainty and high geopolitical and financial risks.

The surge in inflation globally prompts central banks, including the European Central Bank (ECB), to gradually normalise monetary policy. Although the current rise in inflation stems mainly from a negative aggregate supply shock, which central banks cannot easily offset, they are nevertheless responding by raising their interest rates in order to contain inflation expectations and second-round effects. The size of interest rate increases will depend on the path of inflation, the evolution of the output gap and the existence of second-round effects via wages.

In any event, markets are pricing in an acceleration and broadening of interest rate increases as they expect a growing number of central banks to raise their key rates in the course of 2022. Interest rate increases, combined with the surge in inflation and the slowdown in economic activity, have led to stronger risk aversion among investors. Since early 2022, global financial conditions have deteriorated significantly, reflected in a substantial rise in government and corporate bond yields, a fall in stock prices and an increase in volatility, mainly on account of investor concerns about the path of the global economy.

In this unfavourable environment, the dynamic recovery of the Greek economy continued in the first quarter of 2022, but the war in Ukraine, the surge in inflation and the normalisation of monetary policy are expected to dampen growth thereafter. At the same time, the rise in average inflation above euro area levels is likely to worsen the competitiveness of the Greek economy, with negative repercussions on the current account balance. In this context, vigilance is needed to prevent a price-wage spiral. Domestic fiscal policy responded to the adverse conditions by introducing targeted and temporary income support measures for vulnerable social groups worst hit by soaring energy prices. This was done using the available fiscal space without compromising the primary deficit reduction target. In the medium term, ensuring fiscal sustainability is key to achieving sustainable growth rates, preserving the credibility of fiscal policy and upgrading the credit rating of the Greek sovereign to investment grade.

The continuation of reforms and the implementation of the investment projects envisaged in the National Recovery and Resilience Plan are factors that will improve the economic outlook. At the same time, flexibility in PEPP portfolio reinvestments, as well as the policy interventions to be launched by the European Central Bank (ECB) to prevent fragmentation of the euro area financial system, should reduce tensions in bond markets.

Strong growth in the first quarter of 2022 - Significant rise in inflation and worsening economic sentiment
Economic activity expanded at very high rates in 2021 and the first quarter of 2022, offsetting the 2020 pandemic-induced losses. In particular, real GDP grew by 8.3% in 2021, supported by higher private consumption, stronger public consumption, increased private investment, as well as a rapid recovery in exports of goods and services. In the first quarter of 2022, the high growth rate (+7.0% year-on-year) is mainly attributable to private consumption, exports of services, but also to business investment expenditure.

Based on the evolution of the turnover of Greek enterprises and the available short-term indicators of economic activity, regarding e.g. retail sales, building permits and sales of passenger cars, the recovery continues to be broadly based across sectors of economic activity.

Nevertheless, the deterioration of the economic environment and the exacerbation of inflationary pressures, also due to Russia’s invasion of Ukraine, have inevitably created new conditions. As a result, business expectations and consumer confidence declined significantly in April, before strengthening again in May, but remained below their January-February levels. The Purchasing Managers’ Index (PMI) also declined in May, reaching a 14-month low, while remaining at levels suggesting growth.

The main and most visible effect of the energy crisis is an increase in the general level of prices, which reduces the real disposable income of households, in particular the lowest-income groups of society, and intensifies uncertainty about the economic outlook. Inflation, as measured by the Harmonised Index of Consumer Prices (HICP), having fallen to -1.3% in 2020 and partly rebounded to 0.6% in 2021, trended strongly upwards in the first five months of 2022. An upward path, albeit much weaker, was also followed by core inflation (i.e. excluding unprocessed food and energy). It should be noted that the energy component of inflation has continuously been on the rise since March 2021, increasing by 50.8% on average in the first five months of 2022 year-on-year. Headline HICP inflation stood at 10.5% in May and appears to have become more persistent, as higher energy and food prices are now affecting the components of core inflation, i.e. services and non-energy industrial goods.

Financial sector: rising bond yields, falling equity prices and increasing volatility - Greece’s credit rating upgrade is a positive development
Since the beginning of the fourth quarter of 2021, Greek government bond yields have been on an upward trend, in line with international developments, and have increased significantly from their 2021 historical lows and more strongly than the government bond yields of other euro area Member States for similar maturities. This can be explained by the greater sensitivity of low-rated securities, including Greek government bonds, to changes in international monetary and financial conditions. Moreover, concerns about world economic activity, compounded by the war in Ukraine, increase investors’ risk aversion.

However, the first months of 2022 saw also positive developments. These include the upgrade of the credit rating of the Greek sovereign by DBRS and Standard and Poor’s to just one notch short of investment grade. A further one-notch upgrade by these rating agencies will be a very favourable development, as it will place  Greek bonds in investment grade territory, with significant benefits in terms of the borrowing costs of the Greek State, banks and private enterprises, while  also helping to attract foreign investment.

The annual growth rate of bank credit to non-financial corporations (NFCs) decelerated in the first four months of 2022 and their deposits declined from the very high levels of earlier months, without affecting the high liquidity of the economy. The announced shift of the ECB’s monetary policy to a less accommodative stance to curb inflationary pressures (with a first interest rate increase due to take place in July) will lead to rises in domestic bank interest rates.

Forecasts: higher uncertainty, weaker growth and rising inflation
According to the most recent baseline projections of the Bank of Greece, the growth rate of the Greek economy in 2022 is expected to be 3.2%, revised downwards from 3.8% in the Annual Report of April 2022. The revision reflects a further rise in uncertainty in the economy, due to the ongoing war in Ukraine, and increases in costs and prices in general.

Economic growth could turn out higher than the baseline projection of 3.2% if the strong performance of the first quarter continues in the next quarters of this year. However, the risks are tilted to the downside and relate to a further escalation of geopolitical instability, a worsening international economic climate, a disruption in energy supply and a consequent further increase in energy prices.

In 2023, growth is expected to pick up to 4.1%, while for 2024 it is projected to be relatively high, at 3.6%, provided that the geopolitical crisis abates by the end of 2022 and energy prices decline.

In the baseline scenario, consumption expenditure is projected to keep rising in 2022, but at a much weaker pace than in the previous year, due to lower real disposable income and higher uncertainty. In the following years, consumption expenditure growth will strengthen somewhat, supported by a projected rise in employment, as well as a decline in the high savings accumulated  in the past couple of  years  mainly due to the postponement of spending during the pandemic.

Investment is expected to grow at high rates throughout the projection horizon 2022-2024, supported by high liquidity in the banking sector and by the utilisation of available European funds.

Exports of goods have shown resilience during the pandemic and are projected  to grow at a satisfactory pace in 2022-2024. Exports of services are expected to rise. Travel receipts in 2022 should rebound to about 80% of their 2019 level, remaining on an upward trend also in 2023-2024. Finally, sea transport receipts should keep rising, benefiting from a strong freight market. At the same time, however, imports are also expected to increase in line with strengthening domestic – in particular investment – demand.

Headline HICP inflation is projected to reach 7.6% in 2022, mainly driven by energy and food prices, before weakening in 2023 and further in 2024. Core inflation will also be high in 2022 and, although declining in 2023 and 2024, will remain elevated and above the headline measure as the strong inflationary pressures of 2022 feed into underlying inflation.

The economic outlook is subject to uncertainties and risks
Downside risks to the growth outlook of the Greek economy relate to: (a) a further escalation of the war in Ukraine, which would lead to a further increase in uncertainty and stronger and more persistent inflationary pressures; (b) a new wave of the pandemic; or (c) a low absorption rate of EU funds under the Recovery and Resilience Facility. A further tightening of global financial conditions and increased risk aversion on the part of international investors pose risks to the financing of the real economy, as well as to the Greek government’s uninterrupted and affordable access to international capital markets. However, the actions being planned by the ECB to prevent financial fragmentation in the euro area are expected to reduce such risks. In addition, significant risks to the inflation outlook are associated with a possible further increase in international energy prices coupled with a depreciation of the euro vis-à-vis the US dollar, as well as the possibility that inflationary pressures may become more permanent, leading to increases in nominal wages and thereby triggering a wage-price spiral. In the event of a fast and drastic tightening of monetary policy to rein in higher-than-expected inflation and/or a further deterioration in confidence and an economic downturn in Greece’s main trading partners, stagflationary phenomena could be observed in the Greek economy. Additional risks to the Greek economy stem from geopolitical tensions in the Eastern Mediterranean.

Banking system: profitability, decline in capital adequacy, reduction of non-performing loans
In the first quarter of 2022, Greek banking groups posted profits as a result of non-recurring income, a decrease in operating expenses and, most importantly, lower credit risk provisioning.

As regards capital adequacy, both the Common Equity Tier 1 (CET1) and the Total Capital Ratio (TCR) on a consolidated basis fell slightly in March 2022 to 12.2% and 15%, respectively (from 12.6% and 15.2% respectively in December 2021). At the EU level, according to data from the European Banking Authority (EBA), the weighted average CET1 ratio stood at 15.7% in December 2021, while the TCR ratio stood at 19.6%.

By the end of March 2022, the quality of the loan portfolio on a solo basis had improved, with non-performing loans (NPLs) reaching EUR 17.7 billion, down by EUR 0.7 billion from end-December 2021 and by around EUR 91 billion from their March 2016 peak. The ratio of NPLs to total loans declined further in the first quarter of 2022 (March 2022: 12.1%, December 2021: 12.8%), but remained high compared with the EU average of 2.0% at the end of December 2021, according to EBA data. Based on the NPL resolution and management actions under way, a one-digit NPL ratio for the banking sector as a whole is expected to be reached by the end of 2022.

The main challenge facing the Greek economy is to continue the dynamic recovery, which started in 2021, in an unfavourable international environment.

The coronavirus pandemic, the energy crisis, the surge in inflation and heightened uncertainty are exacerbating some of the problems already facing the Greek economy as a legacy of the ten-year debt crisis, which can have a negative impact on both the short-term and the long-term prospects of the economy.

For example, the necessary fiscal measures to support businesses and vulnerable groups of the population are slowing down the reduction of budget deficits, despite a faster-than-expected decline in the debt-to-GDP ratio. The high import dependence of the Greek economy leads to a deterioration of the current account balance. Increased uncertainty about the economic outlook leads to a postponement of investment and consumer decisions, and the expected rise in interest rates could hamper the implementation of investment projects, thereby delaying the closing of the investment gap. In an unfavourable macroeconomic environment of high inflation and weaker demand, the decline in unemployment could be halted and a new generation of non-performing loans could emerge, adversely affecting the financial aggregates of Greek banks.

The slowdown in deficit reduction  risks undermining market confidence in the commitment of fiscal policy to temporary rather than permanent fiscal relaxation and thus to a return to primary surpluses. This could interrupt the downward path of the government debt-to-GDP ratio and, coupled with the adverse international environment, delay the upgrade of the credit rating of the Greek sovereign to investment grade. This, as is already evident, could put significant upward pressure on the borrowing costs of the Greek government. Instrumental to averting this risk will be the actions planned by the ECB to prevent financial fragmentation in the euro area, as well as the implementation of the investments and reforms envisaged in the National Recovery and Resilience Plan, as mentioned below.

The possibility of a partial or total disruption of Europe’s energy supply from Russia requires immediate action to ensure energy security through new investment in gas storage facilities, supplier diversification and extraction of hydrocarbons. In this challenging environment, the ongoing climate change calls for stepping up investment to prepare the economy’s transition to cleaner energy. 

In addition to the problems related to the negative international economic environment, the structural weaknesses of the Greek economy persist, leading to low structural competitiveness. For example, despite significant progress made in some areas in an effort to tackle the pandemic, the administration of justice remains slow, the efficiency of the public sector is still low and Greece lags behind its European partners in the digital transformation of the economy. At the same time, the high dependence of the Greek economy on imports of goods and energy, the increased share of energy in Greek firms’ costs already before the energy crisis, the low average size of domestic businesses and oligopolistic phenomena in several sectors exacerbate the problems of rising international energy and raw material prices and push inflation above the euro area average. Moreover, despite the efforts made in recent years, tax evasion remains very high, hampering the reduction of government debt. The projected demographic deterioration due to population ageing continues to limit the long-term growth prospects of the economy and to increase risks to the pension system.

Prerequisites for sustainable recovery
To address the challenges and uncertainties associated with a  worsened  global economic environment and higher inflation and to ensure that Greece’s credit rating is upgraded to investment grade, economic policy should, in addition to the necessary support to the more vulnerable social groups, depending on the fiscal space available, focus on the implementation of the investments and reforms envisaged in the National Recovery and Resilience Plan and on gradually restoring fiscal sustainability.

In particular, in order to safeguard fiscal credibility, permanent fiscal relaxation measures should be avoided, and any additional income support measures should: (a) target vulnerable groups of the population; (b) be of a temporary nature; and (c) not jeopardise the ambitious environmental targets set.

At the same time, the cash buffer should be maintained at a high level in order to limit debt refinancing risk. Based on the favourable debt repayment profile, it is assessed that medium-term debt sustainability is not at risk. In the longer term, however, the gradual refinancing of the accumulated official sector debt on market terms increases the exposure of the Greek government to interest rate risk. Therefore, in the medium term, fiscal policy should again focus on gradually reducing the primary deficit and returning to primary surpluses from 2023 onwards.

The utilisation of resources from the EU’s long-term budget 2021-2027 and the European recovery instrument NextGenerationEU (NGEU) will be key to addressing investment uncertainty in the new environment of high inflation and geopolitical instability. In the coming years, both public and private investment with European funding is expected to make a decisive contribution to economic growth and to strengthen the long-term productive capacity of the economy.

It is also necessary to restart the privatisation programme – after two years of pandemic-related delays – and to continue the reforms linked to the NGEU. The activation and utilisation of the new REPowerEU instrument proposed by the European Commission will be crucial for speeding up the EU’s energy transition in the medium term and weaning Member States off fossil fuel imports from Russia by promoting renewable energy sources.

Containing inflationary pressures, in particular input costs such as wages and energy, is essential in order to maintain the competitiveness gains achieved over the past decade. Reforms aimed at further deregulating goods and services markets and actions that can protect households’ income from the surge in energy prices could also help in this direction.

Significant interventions are also needed in the labour market. Despite its decline over time, the unemployment rate remains high and could increase due to the impact of the adverse international environment on domestic and foreign demand. It should be noted that the persistently high unemployment of recent years has exacerbated the problem of labour supply and demand mismatches, as a significant part of the workforce has lost some of its skills. Also, factors such as population ageing, workers’ early retirement and the brain drain in the years of the crisis have led to shortages of low- and high-skilled workers. It is therefore necessary to upgrade technical training and streamline the continuing retraining of the workforce so that it acquires the qualifications and skills required for entering and remaining in the labour market. There is also a need for more effective implementation of policies to increase women’s participation in the labour force, by further measures to support working mothers (e.g. working hours, leave, availability of childcare facilities, pre-school and elementary school hours, etc.).

Maintaining the growth momentum requires smooth financing of businesses by the banking system. Co-funding and guarantee programmes supported by public resources, in particular low-interest loans under the Recovery and Resilience Facility, are expected to continue to play a vital role in improving the terms and conditions and availability of bank credit to businesses. However, the continued flow of bank credit and the achievement of the private fund mobilisation targets under the National Recovery and Resilience Plan crucially hinges on a resilient banking system. To this end, it is necessary to address the remaining challenges facing the banking system, namely a further reduction of non-performing loans, an improvement of core profitability and qualitative and quantitative enhancement of banks’ capital base.


Despite the challenges facing the Greek economy in an environment dominated by downside risks to growth, such as the intense inflationary pressures, the partial or total disruption of Europe’s energy supply from Russia, the suspension of investment projects due to mounting uncertainty and rising interest rates, there is also some  good news: the exit from enhanced surveillance next August; the ECB’s planned actions to prevent fragmentation of euro area money and capital markets; the recent upgrade of the credit rating of Greek bonds by two international rating agencies; the strong performance of travel receipts; and the announcement of large investments in Greece by major foreign companies are notable developments that strengthen the medium-term outlook of the economy.

In any event, maintaining the growth momentum in the period ahead is the main challenge facing economic policy. In this respect, the European recovery instrument NextGenerationEU (NGEU) is particularly important for accelerating reforms and increasing public and private investment in digital transformation, green transition and employment growth. A healthy and strong domestic banking system, in partnership with the international financial organisations involved, is called upon to play a central role in achieving the objectives of the National Recovery and Resilience Plan. At the same time, it is crucial to stem inflationary pressures in order to protect the competitiveness of the economy and the real disposable income of consumers. Over the medium term, fiscal policy should focus on achieving primary surpluses. In addition to strengthening the medium-term outlook, these elements of economic policy will also help Greek bonds to obtain investment grade status, thereby enhancing the resilience of the economy to future external shocks.

The full text of the Report is available (in Greek) here.

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