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UPDATE 1-Colombia's cenbank cuts interest rate to 5 pct, surprising market

(Adds comment, details on growth and inflation)

BOGOTA, Oct 27 (Reuters) - Colombia's central bank unexpectedly cut the benchmark interest rate to 5 percent on Friday, as policymakers seek to boost economic growth amid hopes previous rate decisions are beginning to lower inflation.

The seven-member board reduced the lending rate by 25 basis points, contrary to predictions in a Reuters survey, which showed analysts expected the bank to hold steady until inflation anchors within the target range of 2 to 4 percent.

"Inflation for the last three months was lower than expected," said board chief Juan Jose Echavarria, reading from a statement.

"The direct effects of strong transitory supply shocks that deviated annual inflation from the target were diluted and the indicators of basic inflation continue to fall."

The bank also revised upward its 2018 economic growth estimate to 2.7 percent from an earlier prediction of 2.4 percent and said inflation could end at 3 percent that year. For 2017, the bank said inflation could close at 3.9 percent, better than earlier forecasts of as high as 4.2 percent.

There remains a risk economic growth could weaken beyond that "compatible" with the decline in oil prices, the statement said, but Echavarria expressed optimism the board could concentrate more on growth amid "better" inflation.

"My perception is quite optimistic that in the future we can continue to lower rates - not necessarily at the next meeting, not necessarily in every board meeting," he said.

The decision was backed by five board members.

Finance Minister Mauricio Cardenas, who represents the government on the board, hinted this week he would vote for a cut to encourage consumer spending.

"The issue of inflation has been cleared very quickly and above all in a very reassuring way for all, that is what has allowed the interest rate to decrease," he said after the decision.

The central bank cut 250 basis points from the rate between December and August in a bid to stimulate growth in the economy, which has been hit by a decline in domestic consumption and lingering damage from an earlier plunge in international oil prices.

It then paused in September to gauge how inflation would react.

Many analysts are concerned that consumer prices will continue to cause a headache for the economy.

"Colombia's stubborn inflation and some short-term upward risks in tradable prices will keep core inflation above the target inflation range in the coming months," said Banco Agrario's Fabio Nieto.

Annual consumer prices rose 3.97 percent last month but they are expected to increase before year-end to 4.09 percent. (Aditional reporting by Nelson Bocanegra and Carlos Vargas; Editing by Matthew Lewis)