By Steven Scheer
JERUSALEM, Nov 17 (Reuters) - Israel's economy grew at a weaker-than-expected pace in the third quarter on a steep drop in exports, but strong domestic demand and a rise in inflation pressures last month may prevent a further interest rate reduction for the time being.
Gross domestic product expanded at an annualised rate of 2.2 percent in the July-September period, the Central Bureau of Statistics said on Sunday. A Reuters poll of economists had forecast growth of 3.7 percent.
The data follow a report on Friday showing the annual inflation rate increased to 1.8 percent in October from 1.3 percent in September, although inflation remained well within the government's annual target range of 1-3 percent.
Last week, the bureau also said exports bounced back in October to $5.4 billion from $4.2 billion in September.
'These numbers don't support a rate cut,' said HSBC economist Jonathan Katz.
Exports account for about 40 percent of Israel's economic activity and their weakness - partly due to a strong shekel - has been a big concern for policymakers.
The central bank has cut its benchmark interest rate three times since mid-May, the last time in September, to try and halt the shekel's appreciation and help exports and the economy. It held rates steady at its last decision on Oct. 28.
Katz and most other economists expect the Bank of Israel to leave its key rate at 1.0 percent at the next decision on Nov. 25.
Exports slid 16.4 percent in the third quarter, the first decline of the year. Private spending expanded 5.6 percent while investment in fixed assets - largely in industry - grew 16.9 percent and government spending rose 4.5 percent.
'The numbers are rather robust when you look at domestic demand,' Katz said. 'The Bank of Israel is not going to cut ... if domestic demand is robust. That would be going too far and not necessary.'
Growth is projected at 3.4 percent for a second straight year in 2013 including the start to natural gas production at a large well off Israel's Mediterranean coast that began at the end of March. In 2014, economists foresee growth of 3 to 3.4 percent.
Gas output fuelled growth of 4.6 percent in the second quarter, which the bureau revised down from a prior estimate of 5.0 percent.
(Editing by Sonya Hepinstall) Keywords: ISRAEL GDP/
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