UPDATE 2-Swedish central bank starts down road toward normalizing policy

* Riksbank holds repo rate at -0.50 pct

* Says to reinvest coupons, maturing bonds

* Brings forward some purchases

* Repeats sees first hike in mid-2018 (Adds c.bank governor, analyst comment, updates crown)

STOCKHOLM, Dec 19 (Reuters) - Sweden's central bank took its first baby steps toward reversing ultra-loose policy on Wednesday, holding rates unchanged and ending net new bond purchases.

Coupons and maturing bonds will be reinvested, however, and the balance sheet will swell temporarily.

Softening the first shift in the policy since early 2015, when the Riksbank first cut rates into negative territory and started to purchase bonds, the central bank said it would bring forward part of its reinvestment program.

As a result the central bank's holdings of government bonds will increase temporarily in 2018 and the beginning of 2019.

"We are slowly normalizing, but with emphasis on slowly," Governor Stefan Ingves told reporters.

After years of sluggish price increases, the Riksbank's ultra-loose policy has finally started to pay off and inflation has been close to target most of this year.

With the economy growing strongly, negative rates and a hefty bond buying program are looking out of sync, especially after a third hike this year by the U.S. Federal Reserve and tighter policy from the Bank of England.

Norway's central bank recently moved forward plans for its first rate hike.

The Riksbank, which kept its benchmark rate at -0.50 percent, repeated it would start hiking borrowing costs gradually in the middle of next year, helping the Swedish crown make gains against the euro.

But some analysts remain skeptical.

Underlying inflation is likely to dip again while the European Central Bank remains relatively dovish, Nordea economist Torbjorn Isaksson said.

"They might not hike at all next year," he said.

Recent falls in the property market could also dissuade the Riksbank from tightening policy too fast.

Ingves said house prices would probably slide a bit further though he expected the decline to be modest and have little impact on inflation and economic growth.

A bigger fall - if it led to a weaker crown and a surge in inflation - would not put the Riksbank off hiking rates, he said.

"It is not the case that interest rates are set in reference to how the Swedish housing market is functioning," Ingves said.

"If we were to diverge from our inflation goal, then interest rate changes will follow that in one way or another."

The Riksbank cannot wait too long before normalizing policy.

The economy will slow at some point and a crisis - possibly triggered by the housing market - cannot be excluded. If that were to happen in the near future the Riksbank has little left in its arsenal to boost demand.

Most analysts in a Reuters poll had expected the central bank to end net bond purchases, but to reinvest coupons and maturing debt.

Deputy Governors Henry Ohlsson and Martin Floden voted of against bringing forward the reinvestment program. ($1 = 8.3832 Swedish crowns)

(Reporting by Stockholm Newsroom; editing by Niklas Pollard and Toby Chopra/Jeremy Gaunt)