(Adds details, reaction and background)
By Kevin Lim
SINGAPORE, Oct 12 (Reuters) - Singapore defied expectations by sticking to its tight monetary policy stance on Friday, warning of persistent inflation pressure as data showed a quarterly contraction in the economy but a narrow escape from recession due to a revision in the April-June period.
"Core inflation receded recently but will face upward pressure from higher food and services costs. CPI-All Items inflation will remain elevated for some time," the Monetary Authority of Singapore (MAS) said in its half-yearly monetary policy statement.
"MAS will therefore maintain the policy of a modest and gradual appreciation of the S$NEER (nominal effective exchange rate) policy band. There will be no change to the slope and width of the policy band, as well as the level at which it is centred," the central bank said.
The Singapore dollar , the world's 12th most-traded currency, soared after the central bank's surprise decision and was around S$1.2210 to the U.S. dollar compared with S$1.2279 before the data release and policy statement.
The central bank's policy statement was issued at the same time as data showing Singapore's gross domestic product shrank 1.5 percent in the third quarter from the second quarter on a seasonally adjusted and annualised basis.
The contraction was worse than the 1.0 percent median forecast of 16 economists polled by Reuters.
"I am a bit surprised that MAS chose to maintain, given signs that global growth momentum has lost steam and many other central banks have chosen to ease," said CIMB regional economist Song Seng Wun.
"The fact that we averted a technical recession and the worry about the impact of the tight labour market probably kept them from easing."
MAS said core inflation is expected to average around 2.5 percent in 2012 and 2-3 percent next year, while headline inflation is likely to come in "slightly above 4.5 percent" in 2012, mainly because of higher car prices.
The Ministry of Trade and Industry said the quarter-on-quarter contraction in the economy was led by a 3.9 percent decline in manufacturing and a 7.5 percent drop in construction.
Singapore narrowly escaped a technical recession, defined as two quarters of sequential decline in GDP, as second quarter data was revised to show a seasonally adjusted and annualised expansion of 0.2 percent.
The government had earlier said the economy shrank 0.7 percent quarter-on-quarter in April-June.
From a year earlier, the economy expanded 1.3 percent in the third quarter. Second quarter growth was revised to 2.3 percent from a year earlier, higher than the previously stated 2.0 percent.
Singapore manages monetary policy by letting its dollar rise or fall against the currencies of its main trading partners within an undisclosed trading band.
Seventeen of 21 forecasters polled by Reuters before the policy statement had expected MAS to loosen policy by slowing the Singapore dollar's appreciation to support the economy while keeping check on inflation that remains high by historical standards.
Four others predicted the central bank would stand pat due to persistent price pressures as unemployment remained low despite the slowing economy.
At its April policy announcement, MAS reiterated its bias for a "modest and gradual appreciation" of the Singapore dollar and increased the slope of the policy band slightly, indicating it will let the currency appreciate at a faster pace to help lower inflation expectations.
The central bank also narrowed the policy band, indicating it 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