UPDATE 2-SNB keeps ultra-loose policy despite recovery signs

* SNB holds rates, renews FX intervention pledge, bond buys

* SNB raises GDP, plus 2010, 2011 inflation forecasts

* Says deflation risk has decreased but still exists

* Says full recovery may be slower than usual

* Most economists expect no SNB rate rise before H2 2010

ZURICH, Sept 17 - The Swiss National Bank stuck to its full set of drastic measures to support the economy on Thursday, saying some deflation risk persisted and the country may face a bumpy road as it moves out of a deep recession.

The SNB was less pessimistic about the economy but renewed its policy of ultra-low interest rates, bond purchases and market interventions to stop the Swiss franc rising, following other central banks which have kept their loose monetary policy.

"Despite the recent increase in the number of encouraging economic signs, uncertainty as to future developments remains considerable," the SNB said in a statement after its quarterly policy meeting. "In these circumstances, the SNB is opting for caution and retaining its monetary policy unchanged."

Switzerland slipped into its worst recession since 1975 in mid-2008, as demand for its export products collapsed due to the global crisis, and the country had to rescue its largest bank, UBS. But it has weathered the crisis better than many of its peers as its consumers kept spending up.

NO RUSH

Economists said that the SNB seemed in no rush to withdraw stimulus measures given its cautious view on the recovery. However, some analysts noted the central bank's explicit mention of the need to tighten policy at some stage.

"The message is mixed really," Deutsche Bank analyst Henrik Gullberg said. "They ... are surprisingly explicit about how policy cannot remain as expansionary over the more medium-term," he said, adding that the SNB may start raising rates as soon as the first quarter of 2010.

But most economists see the SNB waiting until the recovery gains traction before tightening its policy. "There is nothing that would make us change our view that we will see the first (rate) hike in the second half of next year," said Goldman Sachs analyst Dirk Schumacher.

In a Reuters poll before the rate decision, the median forecast was for a modest 25-basis-point increase in the fourth quarter of 2010.

The Swiss franc briefly fell after the SNB renewed its pledge to act "decisively" to prevent any strengthening of the currency against the euro.

The euro rose to a session high of 1.5232 francs after the decision, before falling back below 1.52. The Swiss franc has been largely stuck between 1.50 and 1.52 per euro since the SNB launched its intervention policy in March.

CAUTIOUS ON RECOVERY

In its assessment, the central bank took a less pessimistic view on the economy than before. The SNB now forecasts a decline of gross domestic product by 1.5 to 2.0 percent in 2009 compared with its previous prediction of a drop of 2.5-3.0 percent.

"Growth is likely to pick up again gradually during the months ahead," it said, warning that a full recovery may take longer than after previous recessions.

The SNB raised its medium-term inflation forecast, saying prices should rise 0.6 percent in 2010 and 0.9 percent in 2011. But there were still major downside risks attached to this forecast. "A risk of deflation therefore remains," it said.

It left its 2009 forecast unchanged, saying consumer prices will fall 0.5 percent on average this year.

But the central bank also noted that it now saw inflation rising above 2 percent by 2012. "The outlook now shows that the expansionary monetary policy cannot be maintained for the next three years because price stability would be compromised in the long term," the SNB said.

The central bank left its target band for the 3-month Swiss franc LIBOR at 0.00-0.75 percent. It will continue to aim to get the LIBOR down to 0.25 percent.

All economists polled by Reuters had expected the SNB would leave rates unchanged and almost all also saw it continuing with its unconventional policy measures.

Key markets for Swiss exporters such as Germany, France and China have started to recover. But politicians and central bankers around the globe remain cautious about when to start withdrawing the huge fiscal and monetary stimulus.