By Hugh Bronstein

BUENOS AIRES, Aug 16 (Reuters) - Argentina's central bank cut its 35-day reference rate for the third week in a row on Tuesday, by 50 basis points to 29.25 percent, after the government reported a steep decline in inflation in July.

The action signals the bank's confidence that disinflation will continue as the government tries to pull Latin America's No. 3 economy out of recession.

Argentine inflation eased to 2.0 percent in July, the Indec data agency said on Friday, less than half of what it was in May, when the government began reporting consumer price data after revamping the country's statistics office.

"The rate cut reflects the fact that inflation outperformed expectations last month," Alberto Bernal, chief global strategist at XP Securities, said in a telephone interview. Bernal forecast inflation at 44 percent in full-year 2016 and 18 percent next year.

Indec had reported 3.1 percent inflation for June and 4.2 percent for May.

The May figure was Indec's first release since President Mauricio Macri took office in December and initiated a slew of open market reforms. Indec had been widely accused of fudging official statistics to make the economy look stronger than it actually was under former President Cristina Fernandez.

The Macri government has not yet released annualized consumer price data or a gross domestic product forecast.

Bernal said GDP is expected to shrink by about 1 percent in 2016, and grow by 4 percent next year. Wages have not kept up with inflation and Macri's decision to slash energy subsidies in the first half of the year have caused a spike in home heating bills that has prompted public protests.

He was jeered on Friday while speaking at a public event in the city of Mar del Plata, and opposition activists threw stones at his motorcade as it left town. On Tuesday, police were shown on television pushing back elderly protesters as they picketed in Buenos Aires for better retirement benefits.

(Reporting by Hugh Bronstein; Editing by Richard Chang)