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The Bank of Greece Interim Report on Monetary Policy 2022

21/12/2022 - Press Releases

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

Strong growth of the Greek economy in 2022 ‒ slower growth projected for 2023

The energy crisis, which was exacerbated after Russia’s invasion of Ukraine in early 2022, has resulted in a sharp rise in inflation. This development led to interventions by monetary authorities, with central banks drastically raising their interest rates, despite the fact that the rise in inflation was in most cases due to negative supply shocks, the direct effects of which cannot be easily neutralised by monetary policy. Yet, the dynamic response of central banks signals their determination to contain aggregate demand and rein in second-round inflationary effects, as well as to anchor inflation expectations with a view to averting a self-sustaining increase in inflation and reaching the price stability target in the medium term. While the key aim of central banks is clear, there is a policy dilemma as to the appropriate size of interest rate increases, hence the output loss that monetary authorities can accept in the short term, in order to stabilise inflation over the medium term.

On the domestic front, rising energy costs and declining real disposable income adversely affect businesses and households and increase income inequality. Moreover, higher lending rates increase the cost of debt servicing for firms and households, while the still very low levels of deposit rates deprive them of an additional source of income.

In the face of high and persistent inflation, there are mounting pressures for increases in wages and pensions, as well as for support measures to limit losses in household real disposable income.

Inflationary pressures and the concomitant rise in interest rates lead to an improvement in banks’ net interest income, but also to a deterioration in banks’ funding conditions, while they could also result in an increase in credit risk associated with the emergence of a new generation of non-performing loans.

In this challenging environment for economic policy, the Greek economy continued to grow at strong rates in the first nine months of 2022. Nevertheless, the prolongation of the energy crisis due to the ongoing war in Ukraine, which keeps inflation at very high levels, has weighed on business and consumer confidence. This, together with the withdrawal of monetary policy accommodation, is expected to lead to slower economic growth in 2023.

Strong growth in the first nine months of 2022 ‒ Significant rise in inflation and growing uncertainty

The Greek economy maintained its growth momentum in the first nine months of 2022 (5.9% year-on-year), despite rising inflationary pressures and the impact of Russia’s invasion of Ukraine. Pent-up household demand and accumulated private sector savings related to the pandemic, together with the strong performance of the tourism sector and the ongoing fiscal support, contributed to the pick-up in economic activity. Growth was mainly driven by private consumption, goods and services exports, and investment, the latter also on the back of stronger corporate profits. By contrast, the increase in imports, largely as a result of strong growth in private consumption and investment, as well as of the robust performance of industrial production, had a negative contribution to GDP growth. Most indicators of economic activity, such as industrial production, retail sales and car sales, continued to suggest positive ‒ albeit decelerating ‒ growth rates through to the third quarter. However, business confidence across all sectors fluctuated and, like consumer confidence, deteriorated gradually, reflecting strong inflationary pressures and widespread concerns about global energy supply. Manufacturing output also declined, according to the Purchasing Managers’ Index (PMI), after a long period of an upward trend.

The most significant impact of the ongoing energy crisis is an increase in the general level of prices, which reduces households’ real disposable income and undermines the outlook for the economy. Inflation, as measured by the rate of change in the Harmonised Index of Consumer Prices (HICP), surged in the eleven months of 2022, to 9.5% on average, reflecting very high increases in energy and food prices. Over the same period, core inflation rose to 5.5% on average, as higher energy and food costs pushed the prices of services and non-energy industrial goods upwards.

Financial developments: rising bond yields, falling stock prices, upgrade of the Greek sovereign credit rating

The tightening of international monetary and financial conditions had an upward impact on the borrowing costs of Greek government and Greek non-financial corporations, as expected. Greek bond yields were actually more sensitive to international volatility than those of other European countries, on account of their lower credit rating and the limited depth of the secondary bond market. Stock prices have been highly volatile; however, due to the resilience of the Greek economy, they have declined less than in the euro area or the United States.

On the other hand, developments in the credit rating of the Greek sovereign have been positive: so far in 2022, two rating agencies have upgraded their credit assessments of the Greek sovereign, reducing the minimum distance to the investment grade to just one notch. This development has also benefited other Greek-based bond issuers, including banks, whose credit ratings have also been upgraded over the same period.

In the ten months of 2022, domestic private sector deposits continued to grow, although at a much slower pace than in the previous two years, while the annual rate of expansion of bank credit to non-financial corporations accelerated on account of the strong economic recovery and increased financing needs amid higher inflation. Bank credit to households has continued to contract, albeit at a slower pace. The interest rate increases by the European Central Bank (ECB) have led to a rise in domestic bank rates that is expected to continue.

Projections: faster-than-expected growth in 2022, slower growth in 2023

According to Bank of Greece forecasts, the growth rate of the Greek economy is expected to turn out at 6.2% in 2022, before slowing down to 1.5% in 2023, due to a projected weakening in euro area economic activity and a significant decline in private consumption growth. Moreover, both fiscal and monetary policy are expected to have a restrictive impact on activity in 2023.

Subsequently, the growth rate of the Greek economy is expected to rebound, reaching 3.0% in 2024 and 2.8% in 2025. These rates can be achieved, conditional on a de-escalation of the geopolitical crisis, a fall in energy prices, continued boost to the Greek economy from international tourism, progress with the implementation of investment projects and a stable growth outlook for the euro area.

Consumer spending is estimated to have continued to grow in 2022, at an even faster pace than in the previous year, reflecting higher employment and its positive impact on incomes, as well as the release of pent-up demand, also using the high savings accumulated during the pandemic. In the years ahead, consumer spending growth is projected to weaken, owing to an expected slowdown in real disposable income growth, while the labour market is anticipated to continue on its positive path, albeit at a slower pace.

Investment is expected to grow very strongly over the entire projection horizon (2022-2025), by 10% per annum on average, supported by the improved liquidity situation of the banking sector and the use of available European funds. In particular, over the coming years, Greece will receive around EUR 40 billion in support from the EU’s long-term budget 2021-2027 and EUR 30 billion from the Recovery and Resilience Facility by 2026. These resources are expected to mobilise additional private resources. At the same time, Greece is expected to attract increased foreign direct and indirect investment.

Exports of goods showed resilience during the pandemic. After an increase of 13.8% in 2021, they are projected to keep growing in 2022 and 2023, but at a somewhat slower pace, due to the deteriorating outlook for the euro area and the global economy. Exports of services are projected to recover strongly this year and move slightly upwards in the coming years. At the same time, however, imports are also expected to increase throughout the projection horizon, as a result of the pick-up in domestic demand, in particular investment.

Inflation, as measured by the Harmonised Index of Consumer Prices, is projected to stand at a very high level in 2022, at 9.4%, driven by the rising prices of energy but also of food. It is expected to gradually moderate in 2023 and further in 2024, mainly on account of the expected decline in energy prices and negative base effects. Inflation excluding food and energy is projected to turn out at 4.6% in 2022 and to remain equally high in 2023, reflecting strong inflationary pressures from the non-energy industrial goods and services components.

Macroeconomic projections are surrounded by increased uncertainty and risks

The outlook for the economy is subject to uncertainties and risks, mainly related to exogenous factors. In particular, the growth rate of the Greek economy could decline more than currently projected in the event of (i) a further escalation of the war in Ukraine, as this would lead to a sharper slowdown of the global economy; (ii) higher and more persistent inflation, which would lead to higher-than-expected increases in nominal wages and thus set in motion a self-sustaining rise in inflation; (iii) a new wave of the pandemic; (iv) a low absorption rate of EU funds; (v) the emergence of a new generation of non-performing loans due to the pandemic and the energy crisis, after the end of government support measures; and (vi) a delay in the formation of government after the general elections and in the fulfilment of economic policy commitments. Heightened geopolitical tensions in the south-eastern Mediterranean region also pose a downside risk to the Greek economy.

Banking system: profitability, decline in capital adequacy, reduction of non-performing loans

In the first nine months of 2022, Greek banks reported profits, as a result of non-recurring income, lower operating expenses and, most importantly, lower credit risk provisions that have been the key driver for the significant losses recorded in the first nine months of 2021.

In terms of capital adequacy, both the Common Equity Tier 1 ratio (CET1) and the Total Capital Ratio on a consolidated basis remained at 13.5% and 16.2%, respectively, in September 2022, unchanged from December 2021 and below the euro area average.

At end-September 2022, the quality of the loan portfolio on a solo basis improved, as non-performing loans (NPLs) stood at EUR 14.6 billion, down by EUR 3.8 billion from end-December 2021 and by EUR 94.1 billion from their March 2016 peak. The ratio of NPLs to total loans for the whole banking system declined further in the first nine months of 2022 (September 2022: 9.7%, December 2021: 12.8%), but remained significantly above the euro area average. All significant banks have already achieved their operational target for a one-digit NPL ratio.


At the current juncture, the most important policy challenge for the Greek economy is to tackle high inflation. Inevitably, the tightening of monetary policy will have negative implications for economic growth in the short term. On the domestic front, the restrictive fiscal policy stance is deemed to be the most appropriate, as it ensures public debt sustainability and complements monetary policy in addressing high inflation. On the other hand, the persistence of inflationary pressures reinforces the need for additional fiscal measures to further support households’ real disposable income in order to mitigate the impact of higher prices (in particular of energy). Economic policy therefore faces a dilemma between macroeconomic stabilisation and fiscal sustainability.

If domestic inflation is higher than that of the euro area, the competitiveness of the Greek economy will deteriorate, which, together with the high dependence on imports of goods and services, could lead to a persistent deterioration of the current account balance. Moreover, rising interest rates add to the cost of refinancing public and private debt. However, interest rate risk in the case of government debt is relatively limited in the medium term, as a result of the favourable repayment profile of the debt, which is mostly held by the official sector, coupled with the timely introduction of interest rate swaps. Nevertheless, the existing favourable features of the accumulated public debt should not lead to complacency, given that the credit rating of the Greek government is at best one notch below investment grade, while in the long run the debt becomes more vulnerable to interest rate risk.

In the labour market, the skill mismatches observed after the pandemic remain a serious problem, with firms finding it difficult to hire suitable staff, as workers either lack the required skills or have shifted to other sectors with better employment prospects. The simultaneous presence of double-digit unemployment rates and a high number of vacancies suggests high structural unemployment. 

Another major challenge refers to strengthening the resilience of the country’s energy system. This requires a diversification of energy supplies, a faster transition to renewable energy sources (RES), development of RES-generated power storage technologies, expansion of energy distribution networks and exploring possibilities of further exploitation of mineral resources.

On top of the challenges brought to the fore first by the pandemic and then by the energy crisis, the Greek economy continues to face chronic problems. Despite progress in improving public finances, reducing the tax burden and social security contributions and increasing openness, structural competitiveness remains comparatively low by European and international standards. In addition, Greece ranks 58th out of 180 countries in the Corruption Perceptions Index according to the Transparency International Survey 2021, while the size of Greece’s shadow economy is still substantial. Finally, problems remain relating to the speed of the administration of justice, the efficiency of the public sector and ‒ despite significant progress ‒ the digital transformation of the economy, as well as longer-term challenges such as population ageing.

Preconditions for sustainable growth

In view of the medium-to-long-term challenges facing the Greek economy and the uncertainties relating to the international economic environment, high inflation and energy supply, the areas on which economic policy should focus are the following:

Containing part of the impact of high inflation on household income, in particular for vulnerable groups of the population, in order to support consumption and preserve growth dynamics and social cohesion. However, income support to mitigate the impact of high inflation should be targeted and temporary in nature and financed using the available fiscal space, without changing the restrictive fiscal stance. Greece’s fiscal performance and the sustainability of its public finances are crucial credit rating factors, much more than for other European countries, as Greece continues to have one of the highest debt-to-GDP ratios in the world.

The implementation of the investment projects linked to the Recovery and Resilience Facility. To this end, it is necessary to press ahead with the reforms included in the National Recovery and Resilience Plan “Greece 2.0”, in particular those involving institutional interventions that help to further deregulate goods and services markets, cut red tape and promote export-oriented investments, thereby strengthening the resilience and structural competitiveness of the Greek economy.

Ensuring that wage cost developments preserve the competitiveness gains achieved over the last decade. In this context, the increase in the statutory minimum wage planned for next year should be in line with the actual capabilities of the economy, so as to avert a phase of second-round inflationary pressures fuelled by a wage-price spiral.

Addressing existing distortions in the labour market. In particular, the unemployment rate, although declining steadily and significantly in recent years, remains one of the highest in the euro area. Moreover, the unemployment rate among vulnerable groups (youth, women) is still high, as is the proportion of the labour force which either works part-time and wants to work more hours or is available to work but is not looking for a job. Also, the problem of skills mismatches remains significant. In order to alleviate these weaknesses, it is necessary to upgrade the technical education and training of vulnerable social groups, as this will equip them with the appropriate skills and improve their employment prospects, in particular in the context of the intended digital transition of the Greek economy.

Accelerating the green transition and enhancing energy security. Tackling the twin energy and climate crises requires accelerating and promoting investment in green technologies, improving energy distribution networks and expanding electricity interconnection infrastructures, as well as developing centralised energy storage systems. In this direction, the REPowerEU Plan aims, in addition to gradually reducing the EU’s dependence on Russian fossil fuels by 2027, at advancing the green transition by accelerating the rollout of renewable energy sources, saving energy, combining investments and reforms, diversifying energy supplies and thus improving Europe’s energy security and autonomy.

Strengthening the resilience of the banking system so that it can smoothly finance Greek businesses and households. Undoubtedly, the cleanup of bank balance sheets over the past few years has been instrumental in improving the aggregates of the banking sector, while rising prices in the real estate market imply higher value of properties held as collateral or owned by banks. However, uncertainty about the effects of interest rate increases, the weaker growth outlook of the Greek economy and the intensifying geopolitical and energy crisis leave no room for complacency. Rather, they call for action to address the challenges associated with the banking system, namely: further reduction of non-performing loans; improvements in operating profitability; qualitative and quantitative enhancement of banks’ capital base, including the Less Significant Institutions (LSIs); and a definitive resolution of private debt managed by Credit Servicing Firms.


The Greek economy grew faster than expected in the first nine months of 2022, benefiting from buoyant tourism receipts and a rebound in domestic demand. However, the adverse international macroeconomic environment weighs on the prospects of the European and Greek economies for the next year. Alleviating the impact of the energy crisis, but without compromising fiscal credibility, and maintaining the growth momentum in the period ahead are the main challenges facing economic policy. Despite the increased risks, the sizeable support available from European funds, coupled with the lower exposure of the Greek economy to the energy crisis compared with the EU average, and the favourable features of its public debt structure, creates such conditions that, should a more adverse scenario for the EU be realised, the impact on the Greek economy would not be so severe.

Moreover, the implementation of investments and reforms under the National Recovery and Resilience Plan “Greece 2.0” and the maintenance of fiscal credibility and stability can make possible an upgrade of Greece’s credit rating to investment grade in the course of next year. This is a very important objective, especially amid a tightening of monetary policy and of international financial conditions that have had an upward impact on Greek government bond yields. In this context, given that 2023 is a national election year, there is a need for an alignment and an understanding among the political forces in order to implement the key economic policy commitments and preserve what the Greek economy has achieved over the past ten years. 

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

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