(Adds details, reaction and background)
By Kevin Lim
SINGAPORE, Oct 12 (Reuters) - Singapore defied expectationsby sticking to its tight monetary policy stance on Friday,warning of persistent inflation pressure as data showed aquarterly contraction in the economy but a narrow escape fromrecession due to a revision in the April-June period.
"Core inflation receded recently but will face upwardpressure from higher food and services costs. CPI-All Itemsinflation will remain elevated for some time," the MonetaryAuthority of Singapore (MAS) said in its half-yearly monetarypolicy statement.
"MAS will therefore maintain the policy of a modest andgradual appreciation of the S$NEER (nominal effective exchangerate) policy band. There will be no change to the slope andwidth of the policy band, as well as the level at which it iscentred," the central bank said.
The Singapore dollar , the world's 12th most-tradedcurrency, soared after the central bank's surprise decision andwas around S$1.2210 to the U.S. dollar compared with S$1.2279before the data release and policy statement.
The central bank's policy statement was issued at the sametime as data showing Singapore's gross domestic product shrank1.5 percent in the third quarter from the second quarter on aseasonally adjusted and annualised basis.
The contraction was worse than the 1.0 percent medianforecast of 16 economists polled by Reuters.
"I am a bit surprised that MAS chose to maintain, givensigns that global growth momentum has lost steam and many othercentral banks have chosen to ease," said CIMB regional economistSong Seng Wun.
"The fact that we averted a technical recession and theworry about the impact of the tight labour market probably keptthem from easing."
MAS said core inflation is expected to average around 2.5percent in 2012 and 2-3 percent next year, while headlineinflation is likely to come in "slightly above 4.5 percent" in2012, mainly because of higher car prices.
The Ministry of Trade and Industry said thequarter-on-quarter contraction in the economy was led by a 3.9percent decline in manufacturing and a 7.5 percent drop inconstruction.
Singapore narrowly escaped a technical recession, defined astwo quarters of sequential decline in GDP, as second quarterdata was revised to show a seasonally adjusted and annualisedexpansion of 0.2 percent.
The government had earlier said the economy shrank 0.7percent quarter-on-quarter in April-June.
From a year earlier, the economy expanded 1.3 percent in thethird quarter. Second quarter growth was revised to 2.3 percentfrom a year earlier, higher than the previously stated 2.0percent.
Singapore manages monetary policy by letting its dollar riseor fall against the currencies of its main trading partnerswithin an undisclosed trading band.
Seventeen of 21 forecasters polled by Reuters before thepolicy statement had expected MAS to loosen policy by slowingthe Singapore dollar's appreciation to support the economy whilekeeping check on inflation that remains high by historicalstandards.
Four others predicted the central bank would stand pat dueto persistent price pressures as unemployment remained lowdespite the slowing economy.
At its April policy announcement, MAS reiterated its biasfor a "modest and gradual appreciation" of the Singapore dollarand increased the slope of the policy band slightly, indicatingit will let the currency appreciate at a faster pace to helplower inflation expectations.
The central bank also narrowed the policy band, indicatingit will allow less fluctuations in the local currency.
(Additional reporting by Eveline Danubrata and Saeed Azhar;Editing by John O'Callaghan and Sanjeev Miglani)
Keywords: SINGAPORE ECONOMY/POLICY