Israel's economy registered moderate growth of 3.4% in the first three months of 2025, as the war in Gaza against Palestinian Islamist group Hamas continued to take its toll, the Central Bureau of Statistics said on Sunday.

The initial estimate for annualized gross domestic product growth in the January to March period from the fourth quarter was largely in line with a 3.5% consensus in a Reuters poll. On a per capita basis, GDP gained 2.2% in the first quarter.

The war in Gaza broke out after Hamas' cross-border attack on southern Israel in October 2023. A ceasefire that came into effect on January 19 this year ended in mid-March, although a ceasefire with Hezbollah in Lebanon has held since late November.

The bureau revised growth in the fourth quarter of 2024 down to an annualized 1.9% from 2.1%.

The conflict led to growth rates of 1.8% in 2023 and 1.0% in 2024. The Bank of Israel last month cut its growth estimate for 2025 to 3.5% from 4.0%.

It will decide on interest rates on May 26 but despite the slow growth partly caused by many civilians being called up for reserve military duty, policymakers are unlikely to reduce short-term rates anytime soon, especially with inflation remaining above the government's 1-3% annual target.

On Thursday, the statistics bureau said the annual inflation rate had surged to 3.6% in April. It had been forecast in a Reuters poll to slow to 3.1% from the 3.3% annual reading in March.

In the first quarter, private spending fell 5%, while exports slipped 1.8% and government spending edged down 0.2%. Economic growth was supported by an 8.7% rise in investment, particularly a 28% jump in residential building.

Excluding the public sector, GDP grew an annualized 4.4% in the first quarter.

Main Tel Aviv share indices rose 1% on Sunday.