UPDATE 2-Chile cenbank cuts rate to 'minimum,' unveils measures

* Central bank target lending rate now at "minimum"

* Rate to remain at current level for prolonged period

* Bank introduces measures to complement monetary policy (Updates with fresh economist comment)

SANTIAGO, July 9 (Reuters) - Chile's central bank cut its target overnight lending rate by 25 basis points as expected on Thursday to a record low of 0.50 percent, and said it was introducing extra measures, including a liquidity facility for banks.

The central bank has now slashed its key rate by 775 basis points since the beginning of the year, leading the charge in Latin America to cut rates and counter the global economic crisis.

It also said the target overnight lending rate would remain at the current "minimum" level for some time.

"With today's decision, the monetary policy rate has been taken to its minimum level," the bank said in a statement, citing "bigger-than-expected capacity gaps and lower imported cost pressures."

Analysts had widely expected the bank to opt for a 25 basis point cut. It was the bank's seventh consecutive monthly rate cut.

"This was the right decision and very coherent with what they have been communicating," said Alberto Ramos, senior economist with Goldman Sachs in New York.

"They have reached the limit, they can't cut to zero so they will have to use unconventional measures to inject more liquidity and expand the money base to ease financial conditions," he added.

The bank said it would set up a liquidity facility for banks which will extend liquidity for 90 and 180 days at the monetary policy rate.

It said it would also limit issues of "central bank discountable promissory notes" to terms of less than a year, and would suspend issuing bonds with maturities of a year or more for the rest of 2009.

"The central bank is using other monetary policy mechanisms, using nonconventional arms to give the market liquidity by other means," said Tomas Flores, an economist with the Instituto Libertad y Desarrollo think-tank.

"But it's not clear to me if this is going to reactivate the economy."

Thursday's rate cut came a day after the central bank said the economy could slow more than expected in the second quarter of the year given weak May activity data.

Chile's slumping economy shrank 4.4 percent in May, a seventh consecutive monthly fall, as the global crisis hammered mining and industrial output as well as forestry and fishing. The economy is this year expected to post its first annual contraction in a decade due to the global financial crisis.

Chile's industrial output plunged 10.5 percent in May from the same month a year earlier, government data showed last week, while the unemployment rate hit a five-year high of 10.2 percent in the March-May period.

Chile's gross domestic product contracted 2.1 percent in the first quarter compared with the same period last year, and the central bank and government have slashed their 2009 GDP forecasts to a range between a 0.75 percent contraction and a 0.25 percent expansion. (Reporting by Antonio de la Jara, Simon Gardner, Alonso Soto and Monica Vargas; Editing by Marguerita Choy)