* Strong franc tightens monetary conditions- Jordan in paper
* Rates must rise over time to keep prices stable mid-term
* Urges parliament to pass tighter bank regulation
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ZURICH, March 29 (Reuters) - The Swiss franc's surge against the dollar limits the Swiss central bank's leeway to raise interest rates, Swiss National Bank vice-chairman Thomas Jordan said in a newspaper interview.
However, Jordan indicated that resuming market interventions was not on the cards because the global economic outlook was much better than in 2009 and early 2010, when the SNB sold billions of francs to stem the currency's rise.
"We are concerned. The (franc's) rise is tightening monetary conditions and that limits our room for manoeuvre in normalising interest rates," Jordan told twice-weekly business newspaper Finanz und Wirtschaft when asked about the dollar's decline.
The franc is trading around 0.92 per dollar, not too far off an all-time high of 0.8963 hit in the wake of this month's devastating earthquake and tsunami in Japan.
The Swiss currency's strength has been the key reason for the central bank to keep borrowing costs at ultra-low levels, despite a brighter growth outlook.
The SNB raised its growth forecast to around 2 percent at its quarterly meeting on March 17 but warned against risks from the disaster in Japan, the debt crisis in the euro zone and the turmoil in the middle east.
Jordan said that while monetary conditions were appropriate overall, interest rates were at a "comfortable" level for the domestic economy while exporters faced a big challenge from the franc's strength.
"Monetary policy will certainly have to become more restrictive over time in order to ensure price stability in the medium-term," Jordan said.
The SNB was not pursuing an exchange rate target. "But the exchange rate is an important indicator for interest rate policy," he said. "A strong franc dampens the economy and inflation. We take that into account."
TOUGHER BANK RULES
Financial markets currently price in a first post-crisis interest rate hike for September.<0#FES:>
However, the International Monetary Fund (IMF) said in its recent assessment of the Swiss economy that the central bank should be in a position to tighten borrowing costs in the near-term, barring any more shocks. [ID:nLDE72R13M]
Jordan repeated the SNB's recent stance that currency interventions were not warranted given the better economic outlook. But the SNB retained the option to intervene, should the economic developments call for it, he added.
The SNB vice-chairman, who is also in charge of financial stability at the central bank, called on parliament to rapidly approve proposed "too big to fail" legislation, aimed at ensuring that the collapse of a big bank would not pull down the whole economy.
"Only when the rules are fully in force would the risk to taxpayers be significantly reduced," Jordan said.
The rules Switzerland is proposing would require banks like
UBS
The country's political parties all agree that tougher rules are needed but have criticised parts of the proposals. The government is expected to issue a formal message to parliament soon and it is possible that a law could be passed this year.
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(Reporting by Sven Egenter and Jonathan Gould; Editing by Ron Askew)