UPDATE 2-Swiss central bank keeps policies unchanged but says housing market needs dampening
* SNB retains cap on Swiss franc at 1.20 per euro
* SNB keeps target range for 3-month Libor at 0.00-0.25 pct
* SNB says housing market not "adequately dampened"
* SNB chairman says does not rule out negative interest rates (Adds comments from media conference)
By Katharina Bart and Albert Schmieder
BERNE, Dec 12 (Reuters) - The Swiss National Bank kept its 1.20 franc per euro currency cap in place in its quarterly policy review on Thursday and held interest rates unchanged near zero, saying the country's recovering economy was still vulnerable.
But it also expressed concern about the housing and mortgage markets, saying they needed to be dampened.
The SNB set the 1.20 threshold more than two years ago to stave off deflation and shield the economy from recession. Investors seeking a safe haven from turmoil in the euro zone had pushed the franc close to parity against the euro.
Recent economic data from Switzerland, which has grown steadily under the cap, has raised questions about the continued relevance of the minimum exchange rate.
Switzerland's economy expanded slightly more than expected in the third quarter, while annual inflation moved into positive territory in November for the first time in two years.
However, inflation rates have been predominantly negative for the last two years, while some data points to weaker economic growth in the fourth quarter, SNB Chairman Thomas Jordan said at a news conference.
"Given the vulnerable economic situation abroad, downside risks still prevail for Switzerland," Jordan said.
The SNB forecast the Swiss economy would grow by around 2.0 percent in 2014 after an expected 1.5-2.0 percent in 2013. It slightly trimmed its inflation forecast, predicting prices would rise 0.2 percent in 2014 and 0.6 percent in 2015, after falling 0.2 percent this year.
"Downside risks to the Swiss economy continue to predominate in the foreseeable future. Therefore, we expect the SNB monetary policy stance to remain unchanged throughout 2014," analysts at SEB said.
The SNB said it stood ready to enforce the minimum exchange rate, and did not rule out using negative interest rates, in which banks essentially pay to deposit money with the central bank.
The central bank kept its target range for the three-month Swiss franc Libor at 0.00-0.25 percent, as all analysts in a Reuters poll had expected.
"We see few surprises in the early part of statement and forex-wise the Swiss franc is little changed," said Global Informa Markets analyst Tony Nyman.
Months after the activation of macroprudential measures aimed at slowing lending on Switzerland's booming real estate market, the SNB said on Thursday conditions on the mortgage market had deteriorated, with growth in residential mortgage lending outpacing GDP growth in 2013.
"The dynamic of the housing and mortgage market hasn't been adequately dampened, and this dampening is necessary in order that the risk does not further increase," Jordan said.
Ultra-low interest rates, along with immigration and Switzerland's appeal as a safe haven for financial investors, have boosted mortgage lending.
Mortgage volumes increased an annualised 4.4 percent in the first three quarters of 2013, while annual economic output rose 1.9 percent over the same period, the central bank said.
At the start of October, Switzerland forced banks to hold extra equity capital of 1 percent of the risk-weighted assets in their mortgage portfolio, a requirement the banks had been working towards since February. Swiss law allows for this counter-cyclical capital buffer to be increased to up to 2.5 percent.
Asked whether the central bank would request a top-up of the buffer from the Swiss government, Jordan said any potential communication on this issue would come from the government.
(Additional reporting by Zurich Newsroom, writing by Alice Baghdjian; Editing by John Stonestreet/Jeremy Gaunt)