JERUSALEM, Nov 17 (Reuters) – Israel’s economy grew by an annualized 3.8% in the third quarter, exceeding expectations despite ongoing conflicts with Hamas in Gaza and Hezbollah in Lebanon. The stronger-than-anticipated rebound suggests that interest rates are unlikely to decrease in the near future.

According to preliminary data from the Central Bureau of Statistics, the GDP growth rate surpassed the 2.9% consensus forecast from a Reuters poll. On a per capita basis, GDP increased by 2.6% during the quarter.

Economic growth was driven by an 8.6% surge in consumer spending, a 21.8% rise in fixed asset investment—particularly in residential construction—and a 1.7% boost in exports. These gains offset a 10.8% decline in government spending. The business sector alone saw a robust 5.4% increase in GDP. By comparison, second-quarter GDP growth was a modest 0.3% annualized.

The economic expansion comes amid heightened geopolitical tensions following Hamas’ cross-border attack on southern Israel on October 7, 2023, and escalating clashes with Hezbollah along the northern border.

Meanwhile, Israel’s inflation rate held steady at 3.5% in September, remaining above the government’s target range of 1-3%. Officials attributed the persistent inflation to supply disruptions related to the ongoing conflict, contrasting with declining inflation trends in other parts of the world.

The Bank of Israel is set to make its next interest rate decision on November 25. Following a rate cut in January, the central bank has maintained the benchmark rate throughout 2023, citing rising price pressures, geopolitical instability, and increased fiscal spending due to the conflict. Despite rate cuts in the U.S. and Europe, Israeli central bankers have indicated that further cuts are unlikely and have left the door open for potential hikes if inflation remains elevated.