(Adds comments from central bank, analyst, background)
SANTIAGO Aug 14 (Reuters) - Chile's central bank cut its benchmark interest rate 25 basis points to 3.50 percent on Thursday despite stubbornly high inflation and left the door open for additional reductions as it looks to boost a quickly stagnating economy.
The bank is in an easing cycle and has already reduced the rate from 5.0 percent since last October.
"The board will consider the possibility of making additional cuts to the monetary policy rate in line with the evolution of domestic and external macroeconomic conditions and its implications on the inflationary outlook," the central bank said in its post-meeting statement.
Although annual inflation stayed above the central bank's 2 to 4 percent target range for the fourth straight month in July, analysts had predicted that concerns about the economy growing at its slowest pace in more than four years in June would lead to additional rate cuts.
"Local economic indicators show that the pace of expansion of output and demand has slowed more sharply than expected. The drop in investment has been compounded by a more marked slowdown in private consumption," the bank said.
Moreover, market participants widely expect annual inflation to return to the midpoint of the bank's tolerance range in the medium term, giving monetary policymakers room for action.
"With inflation expectations anchored at 3 percent, (the rate cut) seems like the right decision, in a context of deteriorating activity, which has impacted labor market dynamism," said Antonio Moncado, economist at Bci Estudios.
The central bank reiterated that in the most likely scenario, inflation will stay above the upper limits of its tolerance range for some months and then return to the target, a situation it said it will monitor "with special attention." (Reporting by Santiago newsroom; Writing by Anthony Esposito; Editing by G Crosse and Dan Grebler)