Singapore econ rebound sets stage for tighter policy

* Q3 GDP up annualised 14.2 pct vs 14.9 pct earlier estimate

* Q3 GDP rises 0.6 pct y/y vs 0.5 pct forecast

* Government forecasts 2010 growth of 3 to 5 percent

* Lifts inflation forecast to 2.5-3.5 pct

By Nopporn Wong-Anan and Neil Chatterjee

SINGAPORE, Nov 19 - Singapore sees a return to modest growth and higher inflation next year, which may spur the central bank to tighten policy in April by allowing its currency to gradually strengthen.

The central bank joined other policymakers around Asia in saying it was watching property prices and lifted its 2010 inflation forecast to between 2.5 and 3.5 percent on Thursday, as a flood of foreign investment raises asset bubble worries.

The upward revision came after Singapore's economy grew 14.2 percent in the third quarter on a seasonally adjusted annualised basis, revised slightly down from an earlier estimate of 14.9 percent growth but in line with forecasts.

Economists said inflation and growth, which the government sees at between 3 to 5 percent next year, could prove higher than expected and this increased the chances of an April tightening that would help head off price pressures and keep the city-state an attractive place for private bank investors to park funds.

"We expect the government to revise up next year's growth projections significantly over time and, although not a high-conviction call at this stage, the Monetary Authority of Singapore will probably return to a policy of modest and gradual currency appreciation in April," said Robert Prior-Wandersforde, senior Asian economist at HSBC.

The Singapore dollar <SGD=D3>, which the central bank uses to set policy by managing it against a secret trade-weighted band of currencies, was little changed after the central bank's comments, at 1.3866 to the U.S. dollar by 0346 GMT.

The central bank said on Thursday the behaviour of the Singapore dollar's nominal effective exchange rate band was consistent with its current policy for zero appreciation in the currency.

"We continue to expect the Singapore dollar to trade close to the top of the Authority's target band and believe the central bank will manage the balance of payments surplus via intervention in the spot and forward FX markets," said economist Wai Ho Leong at Barclays Capital, targeting an exchange rate of 1.37 in three months and 1.34 by end-2010.

"We continue to believe that the risk of a change to a stance of gradual trend appreciation in the SGD NEER in April is rising."

REBOUND

Singapore said the upward revision in its inflation forecast was due to a pending increase in property tax rather than any broader increase in underlying inflation. The previous forecast was for prices to rise 1 to 2 percent next year.

"There has not been any significant change in our assessment of underlying cost and price pressures in the economy from the time of the monetary policy statement release in October," Monetary Authority of Singapore Deputy Managing Director Ong Chong Tee said at a briefing.

Selena Ling, head of treasury research at Oversea-Chinese Banking Corp said, however, inflation was emerging as a potential challenge for a number of Asian economies.

"People tend to look in the rear-view mirror and see Lehman, deflation, etc, but if you look forward, the risks are more on the upside in many Asian countries."

Japan's economy expanded at its fastest pace in more than two years in the third quarter. China, South Korea and Indonesia also have reported a pick up in annual economic growth in the September quarter compared with the previous quarter.

An economic rebound in Asia's major Western export markets, however, has been far more tepid amid weak consumer sentiment. (For more stories on Asia's rapid recovery from recession and risks still facing its export-reliant economies, click on [ID:nSP159130]). (Additional reporting by Kevin Lim and Saeed Azhar; Editing by Tomasz Janowski)