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The Bank of Greece Interim Report on Monetary Policy 2023

20/12/2023 - Press Releases

Today, in accordance with its Statute, the Bank of Greece submitted its Interim Report on Monetary Policy 2023 to the Speaker of the Greek Parliament and to the Cabinet.

Return to investment grade rating provides an opportunity not to be missed for the Greek economy to further improve its performance

The global economy slowed down in 2023. However, it has proved more resilient than had been expected in the beginning of the year, although economic developments have been considerably uneven across countries. Economic activity is weakening in advanced economies and especially in the euro area, whereas developing and emerging market economies are witnessing an only marginal deceleration. The tightening of monetary policy, the phasing-out of fiscal support, persistently high, albeit declining, inflation, high debt, the fallout from the war in Ukraine, geoeconomic fragmentation and a new surge of uncertainty since October triggered by geopolitical tensions in the Middle East, are all having adverse effects on economic activity and expectations. Global inflation, although continuing to decline as a result of policy rate hikes and falling commodity prices, remains elevated and second-round effects seem to become gradually entrenched in its core. Risks to the global growth outlook remain significant. More specifically, heightened geopolitical uncertainties, the erosion of real incomes by inflation and the high debt servicing costs could continue to weigh on economic activity in 2024.

In Greece, the economy continued to expand at a satisfactory albeit slower pace in 2023, outperforming the euro area average. Headline inflation declined sharply, chiefly as a result of falling energy prices. However, upward pressures on the prices of processed food, of non-energy industrial goods and of services kept core inflation at high levels. The steadily improving fiscal performance and commitment to the timely implementation of an ambitious investment and reform programme played a crucial role in the upgrade of the Greek sovereign to investment grade. This development has helped contain the upward effect of higher interest rates on the borrowing costs of the Greek sovereign.

Real economy: Satisfactory yet slower increase in economic activity

Over the January-September 2023 period, economic activity in Greece slowed year-on-year, but remained resilient (+2.2%), even more so compared with the euro area. Private consumption, exports of goods and services and gross fixed capital formation remained the key drivers of growth, despite the adverse effects from the slowdown in global trade and high inflation on these GDP components. On the other hand, higher imports, largely due to rising private consumption and investment, had a negative contribution to GDP growth. Lastly, improved labour market conditions, with a drop in the unemployment rate, robust employment growth and the increase in nominal wages, supported household incomes.

Ηeadline inflation, as measured by the Harmonised Index of Consumer Prices (HICP), declined sharply in 2023, from 7.3% in January to 2.9% in November, mainly on account of large falls in energy prices. Nevertheless, HICP excluding energy recorded high rates of increase, reflecting upward pressures on food prices, as well as on the prices of non-energy industrial goods and services. Food inflation, after its peak in December 2022 (12.9%), has been on a downward path, which however remains fragile because of the ongoing war in Ukraine and the new crisis in the Middle East.

Headline inflation is set to decline further in the coming year, as all its components except energy are expected to trend downwards. Yet, the international environment, and geopolitical developments in particular, give rise to uncertainty, with strong upside risks to the inflation outlook.

Financial developments: The upgrade of Greece’s sovereign credit rating to investment grade mitigates the impact of monetary policy tightening on bond yields

Policy rate hikes by central banks exert an upward effect on Greek government bond yields, as well as on the yields of bonds issued by Greek banks and corporations. However, the upward pressures on Greek government bond yields during the second half of 2023 were offset by positive developments in Greece’s credit rating. More specifically, Scope Ratings in August, DBRS in early September, S&P in October and Fitch in early December 2023 upgraded the Greek sovereign to investment grade.

As a result, Greek government bond yields, as well as their spreads vis-à-vis other euro area government bonds, are now considerably lower compared with early 2023. Accordingly, the volatility of Greek corporate bond yields has been moderate since the beginning of the year, as the positive impact of the sovereign credit rating upgrades has largely offset the upward pressures on yields in the bond market.

Share prices in the Athens Exchange rose strongly between the beginning of 2023 and November, faring much better than those in the United States and the euro area. The banking index performed better than the Athens Exchange composite index, supported by the Greek sovereign’s upgrade to investment grade, banks’ profitability and credit rating upgrades, as well as the resilience of the Greek economy.

Banking sector: Higher interest rates, slowing credit growth, stabilisation of deposits

During the January-October 2023 period, bank interest rates continued to rise, in response to the tightening of the single monetary policy stance. Total bank deposits by the domestic private sector increased only slightly in the same period, by EUR 0.3 billion (January-October 2022: EUR +3.6 billion), as the increase in household deposits was largely offset by a decline in business deposits.

The annual growth rate of bank credit to non-financial corporations (NFCs) weakened in the first ten months of 2023, largely due to the rise in lending rates and the slowdown in GDP growth. Bank lending to businesses continued to be supported in 2023 by the programmes of the European Investment Bank Group and the Hellenic Development Bank, as well as by the Recovery and Resilience Facility (RRF). Compared with NFCs, loans to households declined at a stronger pace during the January-October 2023 period.

Banking system: Positive outlook on the back of the Greek sovereign’s credit rating upgrade to investment grade

The most important development in the first nine months of 2023, which has a positive effect on the outlook for Greek banks, is the Greek sovereign’s upgrade to investment grade. In particular, the upgrade is expected to lead to further upgrades of Greek banks’ credit ratings, thereby helping to contain their increased funding costs in international bond markets amid tighter monetary and financial conditions globally. The direct benefits of the upgrade include an improvement in the quality of banks’ securities portfolios, partly consisting of Greek government bonds, an increase in bank liquidity (as these bonds can now be used as collateral in Eurosystem refinancing operations without the need for a waiver of the eligibility requirements) and lower market risk for banks, by reducing the sensitivity of Greek securities to international market fluctuations. Furthermore, access to international capital markets and the interbank market should become easier for Greek banks, in fact the upgrade has already had a dampening effect on banks’ funding costs from capital markets. Lastly, significant favourable effects on domestic economic activity are expected in the long run as bank profitability increases, credit risk is reduced and the quality of banks’ loan portfolio improves. It should be noted that the upgrade and its drivers, such as improved bank profitability and the resilience of the Greek economy, have been supportive to the divestment of the Hellenic Financial Stability Fund’s stakes in Greek banks.

In the January-September 2023 period, the profitability of Greek banks increased, due to significantly higher net interest income and lower provisions for credit risk. Between December 2022 and September 2023, capital adequacy ratios on a consolidated basis showed marginal changes, remaining lower than the respective euro area average, while the non-performing loan (NPL) ratio on a solo basis fell, although it is still higher than the euro area average. It should be noted that the first nine months of the year saw a net inflow of new NPLs across all loan portfolios. The liquidity coverage ratio (LCR) and the net stable funding ratio (NSFR) rose in September 2023 relative to December 2022, both remaining higher than the respective euro area averages. 


According to the current projections of the Bank of Greece, the growth rate of the Greek economy is expected to turn out at 2.4% in 2023, picking up somewhat to 2.5% in 2024 and 2025 and moderating slightly to 2.3% in 2026. Thus, the Greek economy is set to grow faster than the euro area economy. 

Compared with the June forecast (3.0%), the growth rate for 2024 has been revised down, reflecting the downward revision of euro area growth and the expected higher-for-longer interest rate environment. In the years ahead, the economy will continue to be driven by private consumption, investment and exports, while net trade should have a marginally negative contribution. Monetary policy is expected to keep having a restrictive effect on economic activity, while a positive contribution to growth is expected from investment, backed by RRF funds.

HICP inflation is projected to continue its downward path. In 2023, it is expected to turn out at 4.1%, down from 9.3% in 2022, on the back of a large fall in energy prices. By the end of the projection horizon (2026), inflation should converge towards the 2% target of the European Central Bank (ECB). All its components are expected to contribute to the declining path of inflation. Core inflation is projected to stand at 5.3% in 2023, but to drop sharply in 2024 and to decline steadily thereafter.

Risks and uncertainties

Risks to the growth forecasts of the Bank of Greece are tilted to the downside. In more detail, downside risks to the outlook for the Greek economy include: (i) an aggravation of the geopolitical crisis in Ukraine and the Middle East and the ensuing implications for the global economic environment; (ii) a lower-than-expected rate of absorption and utilisation of RRF funds; (iii) delays in the implementation of reforms, which would hold back the process of improving the economy’s productivity and the competitiveness of businesses; and (iv) extreme weather events (floods and wildfires, as was the case in 2023). Upside risks are associated with stronger-than-expected positive effects from Greece’s credit rating upgrade or, once again, higher-than-expected tourism receipts.


Inflation: For as long as the ECB’s monetary policy tightening is necessary in order to bring down inflation to the 2% target over the medium term, the fiscal policy stance must be restrictive, so as to prevent excess demand that could further add to the current inflationary pressures and thus inflation expectations. It is crucial that national policies contribute to containing inflation expectations, with a view to averting an upward price spiral, which would necessitate more drastic and protracted monetary policy tightening.

High public debt-to-GDP ratio: Despite interest rate increases during 2023, risks to public debt sustainability are contained in the medium term. In the longer term, however, there is increased uncertainty, as the gradual refinancing of accumulated debt to the official sector on market terms will increase the exposure of Greek government debt to interest rate risk.

Non-performing loans and private debt overhang: The NPL ratio, despite its marked decline, remains above the euro area average and, in a higher-for-longer interest rate environment, its further reduction is necessary. At the same time, private debt as a percentage of GDP continues to be very high, acting as a drag on growth.

Chronic weaknesses in the labour market: Despite a visible fall in unemployment thanks to the reforms implemented over the past few years, several distortions persist, with female and youth unemployment rates remaining well above the EU averages. The desirable further reduction of unemployment also depends on how easily firms can hire suitable workers to meet their needs. Job mismatches are holding back a faster fall in unemployment and, coupled with the low labour force participation of women, are dampening potential growth. 

Low structural competitiveness: Greece’s ranking in terms of structural competitiveness has not improved or has even worsened in 2023, after the substantial progress seen in 2020-22. Some comparative disadvantages of the Greek economy, according to the IMD’s composite competitiveness index (June 2023), are lack of a competitive tax framework, an ineffective legal framework and poor corporate governance. Additional examples of inherent weaknesses include tax evasion, red tape and persisting inefficiencies in property transfers, land-use planning, the completion of the national cadastre and the digitalisation of public administration. Special mention should be made to the low effectiveness of the judicial system. As suggested by European Commission data (2023 EU Justice Scoreboard), the time required for the resolution of civil disputes at first-instance courts increased further, to 728 days in 2021 from 637 days in 2019.

Policy recommendations

In an environment of high inflation, slower economic growth, high interest rates and heightened uncertainty because of the successive crises, with increased geopolitical risks and the impacts of climate change becoming more and more evident and affecting broader parts of population, a credible medium-term economic policy planning is of crucial importance. Against this background and with a view to improving economic resilience and addressing the medium-to-long-term challenges as well as the chronic weaknesses of the Greek economy, economic policy should place emphasis on the following areas:

1. Sustained deceleration of inflation. Businesses should limit, where possible, their markups, so as to avert the so-called “profit inflation”. In the short term, more intense controls by the relevant authorities and the Hellenic Competition Commission are required, to curb profiteering and oligopolistic practices. In the medium term, competition in product markets must be enhanced, by removing all kinds of regulatory barriers to competition and market entry. At the same time, wage increases, which become stronger amid a tight labour market, should be such as to recoup losses in workers’ purchasing power, without inducing a wage-price spiral that would harm competitiveness.

2. Faster absorption and effective use of funds under the EU recovery instrument NGEU and the Multiannual Fiscal Framework 2021-2027. These funds should be channelled to economically viable and environmentally sustainable high-tech sectors, which are export-oriented, as well as to the improvement of infrastructures.

3. Pressing ahead with and strengthening reforms, especially in areas with chronic dysfunctions, such as the delivery of justice. Actions (some of which are included in the “Greece 2.0” plan) are therefore required, aimed at modernising and speeding up the delivery of justice, through an upskilling of judges as well as through the digitisation of court archives and judicial processes, adopting legislation for monitoring and improving the performance of judicial staff, and revising the judicial map for administrative, civil and criminal courts.

4. Improving the business environment, with a view to boosting investment and labour productivity. Actions in this direction include cutting red tape and digitalising public administration, as well as improving tax administration and streamlining the tax system, which could strengthen legal certainty for investors and help address the investment gap. At the same time, there is a need to remove the remaining, and excessive by EU standards, regulatory barriers to entry in certain professional services, to increase business R&D spending, which lags behind the European average, and to improve the digitalisation of the Greek economy.

5. Curbing tax evasion. This would create additional fiscal space, enabling a broader reform of the tax system towards greater tax fairness.

6. Reducing the government debt-to-GDP ratio. Although higher interest rates do not pose immediate risks to public debt, thanks to its favourable profile, it should be stressed that such characteristics are not permanent. They merely provide a unique window of opportunity for public debt to remain sustainable going forward, as the concession loans under the MoUs gradually mature and are replaced by new borrowing on market terms. Exploiting this window of opportunity requires the achievement of fiscal surpluses in order to safeguard fiscal sustainability.

7. Tackling the challenges of natural disasters related to climate change. The recent experience with the devastating effects of climate change has demonstrated the need for a “rainy day” fund to finance climate change adaptation and emergency relief, in addition to the necessary investments to mitigate the impacts of climate change over the medium-to-long term. The increased cost of addressing natural disasters should be covered either from European funds or from additional national income sources, while the role of private insurance should also be promoted so as to alleviate the associated budgetary burden.

8. Addressing the problem of job mismatches and raising the labour force participation of women. In order to address labour supply and demand mismatches, it is necessary, among other things, to sustain and upgrade technical education, to reskill long-term unemployed persons and to ensure the continuous development and use of skills throughout the workers’ career. Interventions are also needed to support the integration and retention of female workers in the labour market, which will strengthen economic growth and preserve social cohesion.

9. Further increasing the resilience of the banking sector. Banks need to further strengthen their capital buffers, taking advantage of their increased profitability, which creates favourable conditions for internal capital generation. In addition, the interlinkages between climate change risks and the financial system must be further explored.

10. Addressing private debt held by non-banks. This can be achieved through sustainable workout solutions for viable borrowers and through collateral liquidation in all other cases. Improvements in the out-of-court settlement mechanism and the operation of the Sale and Lease Back Organisation in particular are expected to help address this problem.

11. Attracting foreign investment, which will help to further close the investment gap. This requires improving the business environment, so as to encourage foreign direct investment (FDI) inflows. At the same time, Greek businesses should seek to attract foreign portfolio investment inflows (debt and/or equity financing), which would speed up the implementation of new private investment projects, especially in the high-tech sector. However, this would also require improvements in firms’ financial reporting and overall corporate governance practices, in order to overcome information asymmetries that discourage potential international investors.


The restoration of international investors’ confidence in the prospects of the Greek economy was affirmed by the upgrade of Greece’s sovereign credit rating to investment grade. Furthermore, despite the multiple international crises and heightened uncertainty related to geopolitical tensions, the Greek economy is projected to grow at a faster pace relative to the euro area this and the next years, accelerating the convergence of real per capita GDP towards the euro area average. Nevertheless, the positive prospects should not lead to complacency, as the current credit rating of the Greek sovereign is still well below its 2009 level, as well as today’s euro area average rating. This calls for responsibility and sustained effort to maintain foreign investors’ confidence in the economic policy pursued, paving the way to further upgrades of Greece’s sovereign credit rating.

Key pillars of this effort should be continued fiscal prudence, efficient use of the available EU resources in strategic sectors of the economy and the implementation of the necessary reforms. Such actions will enable a rapid reduction of the public debt-to-GDP ratio, higher investment in sectors related to the green and digital transitions of the Greek economy, as well as an improvement of productivity and structural competitiveness. This will result in a higher potential growth rate, stronger social cohesion and faster real convergence with the euro area.

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

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