* Swiss franc hits record high versus euro
* Economists say SNB trying to find way out of interventions
* Interventions add franc liquidity, create inflation risks
* Swiss start worrying about risk of euro holdings
By Sven Egenter
ZURICH, May 6 (Reuters) - The Swiss National Bank allowed the Swiss franc to rise to a fresh record high against the euro on Thursday, a sign the central bank is moving away from massive currency interventions that could generate inflation.
The billions of francs that the SNB has been pumping into the currency market to buy euros have been adding liquidity at a time when the Alpine economy is on course for a strong recovery and the need for higher interest rates is increasing.
"The pressure has been mounting because the monetary base is rising sharply and this may lead to inflationary pressures," UBS analyst Beat Siegenthaler said. "They may have decided to tolerate a slightly higher franc."
After over a month of near-total stability against the euro at the 1.4325 level, the franc shot up suddenly on Thursday, hitting a new record just above 1.41 per euro.
"It looks like the SNB just pulled their bid," said a trader.
Observing its usual policy, the central bank declined to comment on the market move.
Credit Suisse analyst Fabian Heller said an abrupt end to all interventions was unlikely: "The SNB may let the market take over gradually."
However, the central bank has to phase out its interventions, the last of the emergency measures it adopted to fight the global financial crisis, before it tackles the mid-term inflation threat with higher interest rates, he said.
Most analysts expect a first interest rate increase later this year, though the euro zone debt crisis could conceivably persuade the central bank to stay on hold. <0#FES:>
Moderate inflation of 1.4 percent in April is giving the SNB leeway to keep interest rates low for now. [ID:nLDE6450IH]
But the SNB forecasts a breach of its 2-percent price stability threshold in 2012, and its warnings that deflation might return look increasingly out of place as indicators suggest a strong economic recovery.
Many analysts had expected an eventual rise in the franc, with the median forecast in a Reuters poll published on Wednesday for the franc at 1.4220 per euro in three months. Predictions ranged from 1.3820 to 1.4800. [ID:nRPO1WMsjn]
A Credit Suisse currency analyst said on Thursday, after the franc's jump, that the bank had a three-month forecast of 1.41 and a 12-month prediction of 1.40.
There are now no clear signs of a technical bottom for euro/franc and it may dip below 1.40 at some stage, although the forecasts remain valid, the analyst said.
Siegenthaler said UBS was currently looking at its currency forecasts; it had euro/franc at 1.40 over a three-month horizon "and the new forecast will likely be a bit lower".
SPECULATION
The SNB launched the interventions in March 2009 as part of drastic steps to stave off the threat of deflation at a time when interest rates were practically zero.
After allowing the franc to rise moderately against the euro at the beginning of this year, the SNB began intervening regularly several weeks ago as the euro came under growing downward pressure globally because of Greece's debt troubles.
SNB chairman Philipp Hildebrand said last week that the euro zone crisis could prompt investors to pile more money into the franc, a traditional safe haven, driving the currency higher and raising the risks of deflation pressures. [ID:nLAG006272]
Hildebrand said the central bank was therefore acting decisively to prevent too sharp a rise in the franc.
The SNB has not actively sterilised its interventions. Hildebrand voiced confidence that the central bank would eventually be able to absorb excess liquidity quickly by issuing bills or using reverse repos in the money market.
But Siegenthaler said issuing bills in large amounts would risk creating easy opportunities for speculative position-taking by generating a place for traders to park their francs. This would be counterproductive by undermining the SNB's overriding objective of curbing speculative flows, he said.
RISK
Analysts said the SNB was also facing more public opposition to continued intervention -- not a decisive factor in its decisions, but possibly a contributing one.
SNB statistics show the central bank's currency reserves more than doubled since the start of the interventions, and its euro holdings more than tripled to 56.4 billion euros at the end of the first quarter.
The influential NZZ am Sonntag newspaper quoted unnamed sources as saying the central bank's efforts to keep the franc stable had added another 14 billion euros in April alone.
The newspaper also said the euro was becoming a significant financial risk for the central bank, which could lead to higher provisions and lower profits available to the Swiss government.
"If the whole situation should get worse and the euro ceases to be what it is now, then these holdings should fall in value considerably, and that wouldn't look good for the central bank," ZKB analyst David Marmet said. (Additional reporting by Catherine Bosley and London Forex Team; Editing by Andrew Torchia)