The U.S.-Iran agreement is raising hopes for an end to hostilities, which has led to a partial decline in energy prices. However, the extent of its impact will depend on consistent implementation and the full restoration of energy flows, notes the Bank of Greece in its Monetary Policy Report.
As it notes, in the Greek economy during the first five months of 2026, the expected further decline in inflation (from 2.9% in December 2025) was halted due to the geopolitical crisis in the Middle East and the sharp rise in international energy prices. As a result, inflation accelerated to 4.9% in May from 3.1% in February, exceeding the average inflation rate in the eurozone (3.2% in May).
Higher energy costs are expected to have a secondary impact on the prices of both services and industrial goods. Furthermore, food inflation is expected to remain high, mainly due to increased energy costs associated with the production, storage, and transportation of food products.
Banking Sector: Interest Rate Volatility and Strong Credit Expansion
Interest rates on bank time deposits showed signs of stabilization during the fourth quarter of 2025 and the first four months of 2026, reflecting the stability of the Eurosystem’s monetary policy interest rates during that period. Following an overall increase in private-sector deposits of 10.4 billion euros in 2025, in the first four months of 2026, the stock of deposits recorded a cumulative decline of 3.6 billion euros, standing at 209.6 billion euros in April 2026.
Interest rates on bank loans to businesses showed significant volatility in the fourth quarter of 2025 and the first four months of 2026, following the substantial decline that had preceded them. The weighted-average interest rate for all business loans stood at 4.5% in April 2026, as did the rate for fixed-term loans.
The cost of bank financing was significantly mitigated by programs from the European Investment Bank (EIB) Group and the Hellenic Development Bank (HDB), as well as by RRF co-financing loans, a development that is not fully reflected in the aforementioned loan interest rates.
It is estimated that one-third of new business loans and one-quarter of loans to small and medium-sized enterprises are linked to the financing instruments of the development banks and/or the RRF.
As for households, the average mortgage interest rate fell slightly to 3.3% in April 2026, while approximately 30% of new mortgage loans in early 2026 were linked to the co-financed “My Home II” and “Upgrade My Home” programs, through which interest-free or low-interest financing is provided.
Greek banks continued to post positive results during the first months of 2026, maintaining strong profitability and high levels of capital adequacy and liquidity. The resilience of the Greek economy, despite ongoing geopolitical tensions and increased uncertainty in the international environment, helped maintain the strength of the banking system.
At the same time, the asset quality of Greek banks improved further, narrowing the gap with the European average even more. The sector’s positive performance is also reflected in the continuous upgrades of banks’ credit ratings by international agencies, as the four major Greek banks now hold a BBB+ rating—one notch below the A category.
Forecasts
According to the Bank of Greece’s current forecasts, the Greek economy is expected to continue growing at a rate higher than the eurozone average, supporting the process of real income convergence.
Specifically, GDP growth is projected to reach 1.9% in 2026 and 2027, while it is expected to rise marginally to 2.0% in 2028. Growth is expected to be driven mainly by private consumption, investment, and exports, despite increased uncertainty in the international economic environment.
HICP inflation, following a temporary spike due to international energy developments and inflationary pressures, is projected to gradually ease over the forecast period. Specifically, it is estimated to reach 3.8% in 2026, up from 2.9% in 2025, and then decline to 2.6% in 2027 and 2.3% in 2028, as pressures on energy and food prices are expected to gradually ease.
The recent U.S.-Iran agreement raises hopes for an end to hostilities and a further decline in energy prices. This development increases the likelihood of more favorable outcomes for the Greek economy. Under the most favorable scenario, inflation is pushed down slightly, and macroeconomic indicators in real terms improve compared to the above forecasts.
More specifically, the most favorable scenario projects a faster decline in both oil and natural gas prices. As a result, the Greek economy’s GDP growth rate is projected to be 2.0% in 2026, 2.1% in 2027, and 2.1% in 2028, while HICP inflation is projected to stand at 3.7% in 2026, 2.5% in 2027, and 2.2% in 2028.
The Challenges
The Greek economy has made remarkable progress in recent years, recording growth rates higher than the European average, strengthening its fiscal and financial stability, and advancing significant reforms.
This progress is also recognized by the European Commission, which assesses that Greece no longer faces macroeconomic imbalances. However, significant challenges remain, such as low productivity, the slow shift in the production model, demographic pressures, skills and labor shortages, limited diffusion of innovation, low household purchasing power, and difficulty accessing affordable housing.
At the same time, the economy continues to face challenges related to energy dependence, the persistently high current account deficit, the impacts of climate change, the management of natural resources, chronic institutional weaknesses in public administration and the judiciary, as well as the still-high level of public debt.
Furthermore, inflation continues to run at levels higher than the euro area average, affecting the economy’s competitiveness.
Policy Recommendations
Economic policy in the coming years should focus on transitioning the Greek economy to a more productive, outward-looking, innovative, green, and resilient growth model through a coherent set of reforms and investments.
In the short term, prudent fiscal policy is required that complements the ECB’s monetary policy without exacerbating inflationary pressures. Any measures to support households and businesses should be targeted, temporary, and fiscally sustainable, while at the same time, oversight must be intensified to ensure healthy competition in the markets.
In the medium term, strengthening competition by removing regulatory and administrative barriers is a key tool for containing price pressures and improving competitiveness.
A key priority is to increase productivity through structural reforms that improve the business environment. Speeding up the administration of justice, reducing bureaucracy, increasing the efficiency of public administration, ensuring the stability of the tax framework, and completing spatial and urban planning can significantly enhance the country’s attractiveness for investment.
At the same time, there is a need to further simplify the regulatory framework, expedite licensing procedures, fully digitize administrative processes, and systematically evaluate regulatory interventions.
Particular emphasis must be placed on improving the quality of investments. Available European funds should be directed, as a priority, toward sectors that permanently strengthen the economy’s productive capacity, such as industry, research and development, energy infrastructure, logistics, agri-food, the pharmaceutical industry, export-oriented services, and cutting-edge technologies.
Investments in intellectual capital, innovation, artificial intelligence, and advanced digital applications are particularly important.
It is also crucial to the effective use of European funding instruments in the post-RRF period, namely the resources of the new Multiannual Financial Framework, the Social Climate Fund, the Modernization Fund, and other European programs.
At the same time, a more effective innovation policy is needed. Improving the governance of the research and innovation system, strengthening collaboration between universities, research centers, and businesses, developing the venture capital market, and accelerating the adoption of advanced digital technologies by businesses can significantly boost productivity.
Improving businesses’ access to financing is also a critical priority. The development of financing instruments through the EIB, the EIB Group, and the European Investment Fund, expanding the venture capital market, and promoting alternative forms of financing can help bridge the financing gap, particularly for small and medium-sized enterprises. At the same time, continuing to clean up bank balance sheets and addressing non-performing loans more swiftly will strengthen financing for the real economy.
Strengthening energy security and the economy’s resilience requires accelerating investment in renewable energy sources, storage, networks, and interconnections, combined with improvements in energy efficiency.
At the same time, investments are needed in resilient infrastructure, civil protection, and climate change adaptation, as well as integrated natural hazard management. Particular emphasis must be placed on the sustainable management of natural resources through water supply and conservation projects, improved waste management, increased recycling, and the promotion of the circular economy.
In the labor market, policies are needed to boost the participation of women, young people, older adults, and vulnerable groups. Expanding childcare and long-term care facilities, promoting flexible work arrangements, and strengthening active labor market policies can increase the employment rate.
At the same time, upgrading human capital requires improving education, strengthening vocational training, developing digital skills, and better aligning skills with labor market needs.
Housing
Addressing the housing issue requires increasing the housing supply through faster permitting processes, utilizing vacant properties, boosting investment in housing, and developing policies for affordable and social housing. At the same time, strengthening social cohesion requires upgrading health services, expanding primary care, addressing staff shortages, and reducing regional disparities in access to services.
Finally, maintaining fiscal credibility and financial stability requires continuing to achieve primary surpluses and keeping public debt on a downward trajectory, as well as further strengthening the competitiveness and efficiency of the financial system.
Political Stability
Greece is entering the next phase from a clearly stronger position than in the past, having made significant progress in economic growth, fiscal and financial stability, attracting domestic and foreign investment, and strengthening the credibility of economic policy. A key factor in this progress has been political stability, which has enabled the consistent implementation of reforms, bolstered investor and market confidence, and contributed to the effective management of successive crises. Maintaining political and economic stability, combined with the continuation of reforms and the effective use of European funds, is a key prerequisite for the transition to a more productive, outward-looking, and resilient development model.