The Israeli 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 the Israel-Palestine conflict.

Gross domestic product (GDP) grew an annualized 2.5% in July-September 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 conflict, growth is projected to be around 2% in 2023. For 2024, much depends on the length and whether the conflict remains contained to Gaza or spills over to other fronts, such as with Hezbollah in southern Lebanon.

Israel has bombarded the Gaza Strip from the air and land, imposed a siege and mounted a ground offensive in retaliation to the Oct. 7 Hamas incursion.

Nearly 19,000 Palestinians have since been killed and about 51,000 injured in the Israeli onslaught, according to Gaza’s health authorities.

The Israeli death toll in the Hamas attack stands at 1,200, while 135 hostages are still held by the Palestinian group in Gaza, according to official figures.

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 but was 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 supports 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 stabilizing markets and reducing uncertainty. The shekel 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 ten 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 last week showed policymakers were also concerned over an expected sharp rise in state spending to help finance the conflict and compensate those impacted by the Oct. 7 attacks.

In the third quarter, consumer spending rose 2%, exports jumped 7.4%, investment in fixed assets increased 1.6%, and government spending gained 5.6%.