JERUSALEM - Israel's economic growth is set to slow sharply to 3% in 2023 after rapid expansion in the prior two years, the Finance Ministry said on Monday as it cut its estimate from 3.5%, citing more restrained consumer and state spending.

Consumer spending - more than half of Israel's economic activity - looks to ease to 3.2% growth in 2023. Exports, another key growth driver, is expected to grow 4.2% next year.

This year, boosted by higher consumer spending expected at 7% and a surge in exports (+11.8) and investment (+10.9%), growth is forecast at 6.3%, revised up from the ministry's prior estimate of 4.9% in July.

Israel's economy grew 8.6% in 2021 in a year the ministry said was a recovery from the COVID-19 pandemic.

Inflation, it said, is expected to end 2022 at 5.1% but ease back to 2.7% by the end of next year, moving back to within on official annual 1-3% inflation rate range amid aggressive Bank of Israel interest rate increases.

To combat inflation and high living costs, the central bank has raised its benchmark interest rates to 3.25% from 0.1% in April. The rate is expected to reach as high as 4%.

The Bank of Israel will decide again on interest rates on Jan 2 while also publishing updated macroeconomic forecasts. In October, it projected economic growth of 6% in 2022 and 3% in 2023, with an inflation rate of 4.6% this year and 2.5% rate next year.

(Reporting by Steven Scheer, Editing by William Maclean)