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UPDATE 2-Singapore escapes recession, keeps tight monetary policy

* MAS to continue allowing modest, gradual SGD appreciation

* Inflation to exceed 2012 forecast, stay high in 2013

* Q3 GDP -1.5 pct q/q s/adj and annualised, worse than forecast

* Q2 GDP revised to show q/q growth * Analysts warn Singapore could face further inflows

(Adds details, analyst comments)

By Kevin Lim

SINGAPORE, Oct 12 (Reuters) - Singapore defied forecasts on Friday by keeping monetary policy tight and allowing the local dollar to appreciate at its current pace, bucking the regional trend as it warned of persistent inflationary pressures in a slowing economy.

The trade-dependent economy contracted more than expected in the third quarter, and most economists had predicted an easing of policy as the island barely avoided a recession du e to a r evision to the second quarter numbers.

But high inflation, fed partly by a tight labour market because of policies to control the influx of foreign workers in the densely populated city-state, remained a key concern for the central bank.

Singapore's Ministry of Trade and Industry, which released data at the same time as the monetary policy statement was issued, stuck to its forecast for GDP growth of 1.5 to 2.5 percent this year. The economy grew 4.9 percent in 2011.

While other countries in the region have seen inflation slow, Singapore's central bank said headline inflation is likely to "come in slightly above" its forecast of 4.0 to 4.5 percent for this year and ease gradually to 3.5 to 4.5 percent in 2013.

Core inflation, which excludes cars and housing as these are more influenced by government policy, will average around 2.5 percent this year and stay in a 2-3 percent range next year, the Monetary Authority of Singapore (MAS) added in its half-yearly monetary policy statement.

"MAS will therefore maintain the policy of a modest and gradual appreciation of the S$NEER (Singapore dollar 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," it said.

Singapore manages monetary policy by letting its dollar rise or fall against the currencies of its main trading partners within an undisclosed trading band.

The decision to keep monetary policy tight contrasts with South Korea, whose central bank cut its base rate by 25 basis points on Thursday to the lowest in 19 months as it slashed the country's 2012 growth forecast to 2.4 percent from 3.0 percent.

Australia, India and China have also eased monetary conditions over the year to support growth, while Indonesia, whose economy has held up better than most Asian countries, held its benchmark rate steady for an eighth consecutive month on Thursday. Indonesia's key rate is still at a historical low.

The Singapore dollar , the world's 12th most-traded currency, soared after the surprise decision. It was trading around S$1.2209 to the U.S. dollar versus S$1.2279 before the release of the policy statement and GDP data.

"This decision could spark a rush of foreign capital into Singapore dollar assets," said Barclays economist Leong Wai Ho. "We could see more testing of the upper limit of the band."

<^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ TEXT-Singapore monetary policy statement POLL-Muted 2013 looms for Asian economies TAKE A LOOK-Asian central banks For a graphic ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^> SING DOLLAR SOARS

The Singapore dollar has gained 6.2 percent against the U.S. dollar this year, the best performer among Asian currencies tracked by Reuters.

It has traded near the top end of its policy band for most of the past few months and traders said MAS has intervened on several occasions to keep it within the band.

Seventeen of 21 forecasters polled by Reuters expected MAS to loosen policy by slowing the Singapore dollar's appreciation to support the economy while keeping a 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 remains 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. The central bank also narrowed the policy band in April, indicating it will allow less fluctuations in the local currency.

TIGHT LABOUR MARKET

Singapore's gross domestic product shrank 1.5 percent in the third quarter from the second quarter on a seasonally adjusted and annualised basis, data released on Friday showed.

The contraction was worse than the 1.0 percent median forecast of 16 economists polled by Reuters.

The trade ministry said the quarter-on-quarter drop was led by a 3.9 percent decline in manufacturing and a 7.5 percent fall in construction.

But Singapore dodged 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.

From a year earlier, the economy grew 1.3 percent in the third quarter, lower than an upwardly revised 2.3 percent expansion in the second quarter.

The government previously said the economy shrank 0.7 percent quarter-on-quarter but grew 2.0 percent year-on-year in the April-June period.

"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.

MAS said that although Singapore's growth next year will come in slightly below the economy's potential rate, the city-state will likely continue to be at full employment.

"Growth will be supported by domestic-orientated activities such as construction and some pickup in tourism and financial services," it said.

The central bank said "persistent tightness in the labour market will support slightly stronger wage increases in 2013, which will continue to be passed through to consumer prices".

Singapore's jobless rate fell to 2.0 percent in June from 2.1 percent in April.

ANZ Bank's head of Southeast Asian economics Aninda Mitra said the pressure on the labour market could increase further.

"Amidst upward revisions to GDP growth (in Q2) and no let-up in the policy stance, authorities may opt to reconsider the extent of tightening of foreign worker hiring rules to alleviate labour market pressures," he said.

(Additional reporting by Eveline Danubrata, Saeed Azhar, Anshuman Daga and Jongwoo Cheon; Editing by John O'Callaghan and Sanjeev Miglani)

((Kevin.Lim@thomsonreuters.com)(65)(6403 5663))

Keywords: SINGAPORE ECONOMY/POLICY