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UPDATE 1-Swiss price pressure still weak a year after franc cap

* CPI down 0.4 pct year/year, up 0.3 pct month/month

* Deflationary trend easing a year after SNB capped franc

* Franc weakens in recent weeks to around 1.21 per euro

* Unemployment steady at 2.8 pct

(Adds quotes, data on joblessness, SNB's forex reserves)

By Catherine Bosley

ZURICH, Oct 8 (Reuters) - Swiss consumer prices fell at a slightly slower pace in September, although there is little sign of inflationary pressure resuming, suggesting the central bank will maintain its currency cap to ward off deflation and the risk of recession.

A string of recent data, including weak manufacturing, has painted a downbeat picture of the Swiss economy, which will encourage the central bank to maintain the limit imposed on the franc a year ago to support exporters and relieve downward pressure on prices.

Slowing domestic demand, due in part to an expected increase in unemployment would also limit price rises, economists say. However, the unemployment rate held steady at 2.8 percent in September, data on Monday showed.

Swiss consumer prices fell 0.4 percent from a year ago, compared to a drop of 0.5 percent in August, and were 0.3 percent higher compared with the previous month. Both figures were in line with average analyst forecasts .

Citing the risk of deflation and a recession, the Swiss National Bank (SNB) set the cap on the franc at 1.20 per euro on Sept. 6, 2011 after investors seeking a safe-haven from the euro zone crisis pushed the currency to record highs.

"Prices are going in the right direction. The negative price dynamics are running out now, especially because the Swiss franc floor has been there a year now," said Cornelia Luchsinger of Zuercher Kantonalbank.

The franc was little changed after the data, hovering at 1.2109 per euro and at 0.9339 to the dollar at 0957 GMT.

As the euro zone crisis escalated again between April and July, the SNB had to intervene heavily to defend the 1.20 limit, but the franc has weakened again in recent weeks, as financial markets have become more stable, to trade around 1.21.

In a sign that pressure on the cap has eased, the pace of increase of the SNB's foreign exchange reserves slowed sharply last month, data on Friday showed.

Moreover, the amount of cash commercial banks hold with the SNB - called sight deposits and considered an early indicator of the SNB's interventions - fell for the third week running last week, data on Monday showed.

NO REASON TO CHANGE COURSE

The SNB's forex holdings stood at 73 percent of annual output at the end of September. Yet despite the big increase in liquidity, economists expect inflation to stay subdued, below the SNB's 2 percent price stability threshold.

"The general trend in Switzerland is that there is no inflation," said Sarasin economist Alessandro Bee. "For the end of the year we expect inflation around zero so that is no reason for the SNB to change course."

The SNB, which says the franc is still overvalued at 1.20, forecasts prices to fall by 0.6 percent this year and rise just 0.2 percent and 0.4 percent respectively in 2013 and 2014.

Core inflation, which strips out volatile price elements such as fuel, dropped 1 percent in September, after a 1.1 percent decline in August. The prices of imported goods fell 1.7 from a year earlier last month, the CPI data also showed.

Recent economic data has been weak: manufacturing contracted for a fifth month running in August, consumer sentiment weakened further in the third quarter, and the ZEW investor sentiment index fell in September.

Unemployment is expected to tick up to 3.3 percent by 2013, according to the State Secretariat for Economics.

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(Reporting by Catherine Bosley, Martin de Sa'Pinto and Emma Thomasson; Editing by Susan Fenton)

((catherine.bosley@thomsonreuters.com)(+41 58 306 7461))

Keywords: SWISS ECONOMY/