BUENOS AIRES, Sept 27 (Reuters) - Argentina's central bank held its reference rate at 26.75 percent on Tuesday, ending an eight-week cutting cycle as policymakers try to damp inflation.

The bank said on Monday it would continue to set a weekly policy rate in 2017, but in January would stop tying the rate to the 35-day Lebac securities, moving instead to a seven-day interbank lending rate.

Inflation slowed sharply in greater Buenos Aires in August, to 0.2 percent from 2 percent in July. That was in large part because the Supreme Court forced the government to restore home heating gas subsidies until public hearings could be held, keeping prices low for consumers.

Argentina's economic activity shrank 0.4 percent in July from the previous month, government data showed on Tuesday, in a sign recession continues. Gross domestic product data earlier in the week showed the economy contracted for a third straight quarter in the April-to-June period.

President Mauricio Macri appointed a new central bank chief after taking office in December and embarked on a number of free-market reforms.

Still, the inflation rate remains stubbornly high. Analysts in a recent central bank poll forecast inflation of 41 percent this year and 19.8 percent in 2017.

The central bank has an inflation target of between 12 percent and 17 percent in 2017 and 8 percent to 12 percent in 2018.

(Reporting By Caroline Stauffer; Editing by Alan Crosby)