(2nd LD) BOK chief sees possibility of 1 pct contraction this year over pandemic

(ATTN: RECASTS headline, lead; UPDATES with Gov. Lee's remarks throughout)

SEOUL, Aug. 24 (Yonhap) -- South Korea's top central banker said Monday he does not rule out the possibility of the economy contracting around 1 percent this year as downside risks have heightened amid a flare-up in virus cases.

Bank of Korea (BOK) Gov. Lee Ju-yeol presented the grim prospect for Asia's fourth-largest economy, saying that it will sharply lower the economic growth outlook this week over spiking virus cases.

"In May, the BOK's growth projection was a 0.2 percent contraction. But I think we will have to sharply lower the outlook," Lee said in a parliamentary session, when asked by a lawmaker if the BOK would trim the forecast to some a 1 percent fall.

The BOK will hold its rate-setting meeting and announce its revised economic outlook Thursday.

Lee said downside risks on the economy have increased, as the resurge in COVID-19 infections has prompted the government to raise the level of social distancing across the nation.

"This will likely have a negative impact on the economy significantly. It is necessary to sharply lower the economic growth look," he said.

The governor earlier said in a report to the National Assembly that the momentum for economic recovery is expected to remain weak amid the uptick in virus cases.

"After suffering sharp deterioration, the Korean economy showed some signs of an improvement on eased slumps in exports and consumption," Lee said.

"But as virus cases have recently resurged, the economic recovery is expected to remain weak, and economic uncertainty has further heightened," he added.

The South Korean economy contracted 3.3 percent in the second quarter from three months earlier, the worst performance in over two decades, as exports tumbled amid the COVID-19 pandemic.

To bolster the slumping economy, the BOK slashed its key policy rate in May to a record low of 0.5 percent after delivering an emergency rate cut of half a percentage point in March.

Policymakers earlier forecast a rebound in the third quarter on the back of the country's massive budget spending and an improvement in global production.

But the possibility of nationwide virus outbreaks and another wave of the COVID-19 pandemic are likely to put downward pressure on the economic recovery.

South Korea reported 266 more cases of COVID-19 on Monday after its daily new virus cases topped 300 for the third straight day. The country has reported nearly 2,900 virus cases over the past 11 days.

Experts forecast the BOK will stand pat at the key rate Thursday despite spiking virus cases, as it is expected to seek to gauge the impact of its rate cuts amid tamed inflationary pressure.

Lee said the country's consumer prices will likely move in the zero-percent range for the time being.

The governor also said the BOK will manage the monetary policy in an accommodative manner in a bid to prop up the local economy and keep close tabs on the economic repercussions of the virus outbreak.

"We will also closely monitor changes in financial stability, stemming from growing household debt amid rising home prices and excessive cash inflows to the housing market," Lee added.

Ruling party lawmakers blamed the BOK's long streak of low rates for jacking up housing prices.

The government came under public fire for its failure to stabilize the housing market despite a series of measures.

The BOK governor defended the need for monetary easing, stressing that it helped companies secure funds in the first wave of the virus outbreak in March.

"Low rates had the side effect of raising asset prices, but the accommodative policy stance had far more positive impacts (on the economy)," Lee said.

sooyeon@yna.co.kr
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