By Steven Scheer and Maayan Lubell

JERUSALEM Israel's economy slowed less than expected in the first quarter of 2023 due to strong industrial investment and along with strong inflation is expected to keep pressure on policymakers to rein in rising prices.

Gross domestic product grew an annualised 2.5% in the January-March period from the prior three months, the Central Bureau of Statistics sahttp://content.reuters.com/auth-server/content/tag:reuters.com,2023:newsml_RC2F40A2TMDP:1092978338/tag:reuters.com,2023:binary_RC2F40A2TMDP-BASEIMAGE?action=download&mediatype=picture&mex_media_type=picture&token=MqYULLtbgkOnMvxSBRZ9AQZ6an7AoKYrImvrSv5CoSE%3Did on Tuesday. A Reuters poll of analysts had forecast a 1.8% rise.

First-quarter growth slowed from 5.3% in the fourth quarter, unrevised from a prior estimate.

"This print supports a 0.25 hike next week, also following the high CPI number in April," said Jonathan Katz, chief economist at Leader Capital Markets.

The Bank of Israel on May 22 will decide on interest rates.

With inflation stubbornly high, partly due to a weaker shekel, the central bank has raised rates more than it had planned - to 4.5% from 0.1% in April 2022.

Data on Monday showed the annual inflation rate holding steady at 5% in April versus expectations of an ease to 4.7%.

Israel's economy grew 6.5% in 2022 and is expected to grow 2.5% in 2023, according to the Bank of Israel and the International Monetary Fund (IMF).

The Finance Ministry on Tuesday trimmed its 2023 growth forecast to 2.7% from 3% and saying the slowdown would cut tax revenue this year by 5.3 billion shekels ($1.5 billion).

It said the new forecasts take into account the fallout from uncertainty over the government's judicial overhaul plan, which has been suspended due to heavy political and public pressure and amid a steep drop in foreign investment into tech firms that has weakened the shekel to a three year low versus the dollar.

Some analysts warn that the 2023 and 2024 state budget that must be approved by the end of the month does not do enough to encourage growth.

In the first quarter, investment in fixed assets grew 14.7%, although exports fell 3.5% and private spending dipped 1.7%.

On a per capita basis, GDP grew 0.1% in the first three months of the year.

The shekel was flat at 3.66 per dollar, while Tel Aviv share indexes were also largely unchanged.

($1 = 3.6280 shekels)

(Reporting by Steven Scheer and Maayan Lubell; Editing by Sharon Singleton and Angus MacSwan)