* IMF says Singapore monetary policy appropriate
* Policy changes should wait until recovery is underway
* Singapore dollar weaker than equilibrium level
* IMF worried about worsening asset quality at banks (Adds details, quotes, economist comment)
By Lesley Wroughton and Nopporn Wong-Anan
WASHINGTON/SINGAPORE, Sept 1 (Reuters) - The International Monetary Fund advised Singapore to keep monetary policy unchanged until its economy recovers and to allow the Singapore dollar to strenghten once the upturn was visible.
In its annual review of Singapore's economy, the IMF said monetary policy was "broadly appropriate" and supportive of domestic demand without undermining exchange rate stability. The IMF's view is in line with economists' expectations.
"The focus now is to preserve financial stability and to ensure that Singapore is well positioned to rebound once the global economy recovers, taking advantage of the ample room for maneuver at the authorities' disposal," the IMF said in a statement late on Monday.
"Further along the recovery path, a tightening stance would be warranted to safeguard price stability, through targeting a trend appreciation of the nominal effective exchange rate," it added.
Singapore's central bank manages monetary policy by adjusting the Singapore dollar against a secret basket of trade-weighted currencies. In April, it shifted the midpoint of the trading band lower, effectively a one-off devaluation of the currency.
Its next policy review is in October and many analysts believe the central bank will keep its accommodative stance despite a surprisingly strong economy in the second quarter.
"All comments we have from the authorities are that the recovery that appears to be taking place is not certain yet, as we are in a period of wait and see and inflation expectations are still very much under control," UBS economist Edward Teather said.
The report from the IMF, whose staff met Singapore officials in May, appeared to exclude second quarter gross domestic product, which grew 21 percent on a seasonally adjusted and annualised basis from the previous quarter.
Singapore's economy would likely contract by about 8 percent in 2009, with the trough in GDP probably occurring in the fourth quarter, the IMF said, contrary to Singapore government expectations of a 4-6 percent contraction.
"If the IMF were to redo its work now, they would come to a much more sanguine conclusion," Teather said.
The IMF projected GDP should grow about 2.5 percent next year, but Singapore authorities believe growth could be stronger given signs of resilience in Asian trade and in advanced economies, the IMF said.
It also said its staff assessment of the value of the Singapore dollar showed the currency "appears to be somewhat weaker than its medium-term equilibrium level" but should recover once the world economy rebounds.
"The real effective exchange rate would likely strengthen, in line with fundamentals, once a global recovery takes hold."
It said the large fiscal stimulus provided by the government in January should limit damage from the recession on households and businesses. It also welcomed the authorities' readiness for further stimulus should the rebound prove weaker than expected.
The IMF noted there was broad consensus that bank's credit quality will go downhill as the recession drags on.
The view echoed market concerns as the Royal Bank of Scotland downgraded Singapore banks to "underweight" last week, citing risks of deterioration in their asset quality. (Editing by Jan Dahinten)