Israel rate cuts possible after Q3 GDP revised down, inflation eases

JERUSALEM, Dec 17 (Reuters) - Israel's economy grew slower than initially thought in the third quarter, data from the Central Bureau of Statistics showed on Sunday, helping to raise prospects of the start of rate cuts in the wake of Israel's war with Palestinian militant group Hamas.

Gross domestic product grew an annualised 2.5% in the July-September period from the prior three months, compared with a prior estimate of 2.8%. On a per capita basis, GDP grew 0.6%.

The economy grew 6.5% in 2022 and, partly due to a negative impact from the war, growth is projected at around 2% in 2023. For 2024, much depends on the length of the war and whether the conflict remains contained to Gaza or spills over to other fronts such as with Hezbollah in southern Lebanon.

Israel's offensive in the Gaza Strip was launched after the deadly cross-border rampage by Hamas gunmen on Oct. 7.

Economists expect a contraction in the fourth quarter.

Data on the economy followed figures on Friday showing inflation eased more than expected in November. The bureau said Israel's annual inflation rate fell to 3.3% from 3.7% in October, below a Reuters consensus of 3.5% but still above the government's 1%-3% target range.

"Clearly a rate cut on Jan. 1 is back on the table, with this downside inflation surprise," said Leader Capital Markets Chief Economist Jonathan Katz. "The breakout of hostilities support weakening inflationary pressure on the demand side in the short run."

Despite weakening growth and consumer prices, the Bank of Israel has been reluctant to begin lowering short-term interest rates, citing a main focus on stabilising markets and reducing uncertainty. The shekel though has appreciated more than 10% versus the dollar since hitting a low on Oct. 26.

The decision to hold rates steady at its last meeting on Nov. 27 was the fourth in a row and followed 10 straight rate increases that had taken the policy rate up from 0.1% in April of 2022 to 4.75%.

Minutes of the latest meeting's discussions issued last week showed policymakers were also concerned over an expected sharp rise in state spending to help finance the war and compensation to those impacted by the Oct. 7 attacks.

In the third quarter, consumer spending rose 2%, exports jumped7.4%, investment in fixed assets increased 1.6% and government spending gained 5.6%. (Reporting by Steven Scheer; Editing by Alison Williams)