* Easy policy can stay for extended period - think tank
* Economic growth slow, inflation extremely low
* Retail, credit data shows depressed consumer confidence
By Choonsik Yoo
SEOUL, May 23 (Reuters) - South Korea needs to maintain an expansionary monetary policy for a longer period as the economy is growing slower than forecast while inflation eases to a 14-year low, a government think tank said on Thursday.
Corporate investment in industrial plants and equipment would grow by only about half the pace seen previously even after registering the second-worst decline in 11 years in 2012,the Korea Development Institute (KDI) said in a report.
Private consumption will not recover as fast as previously expected, it said, as separate data released early in the day provided further evidence that South Koreans were cutting down on spending due to uncertain economic prospects.
"(The central bank) needs to operate its policy in a flexible manner depending on future inflation and economic conditions while keeping the currently accommodative stance for the time being," the KDI said.
It forecast this year's economic growth at 2.6 percent and inflation at 1.8 percent, which will mark the lowest level since 1999, compared with its previous projections released in November for 3.0 percent and 2.3 percent, respectively.
Last year, South Korea's economy, the fourth-largest in Asia, grew by a provisional 2.0 percent and inflation was at 2.2 percent on an annual average basis.
The KDI is affiliated with the Ministry of Strategy and Finance and Minister Hyun Oh-seok was the chief of the institute until he was picked by President Park Geun-hye, who took office in late February, as her first finance minister.
In November, the KDI recommended the Bank of Korea cut interest rates to support the export-reliant economy, a policy advice that the central bank followed early this month by cutting its benchmark interest rate.
CAPITAL SPENDING, CONSUMPTION BOTH WEAK
The government of President Park has cut this year's economic growth projection to 2.3 percent from 3.0 percent set by the previous government and introduced a supplementary budget including $5 billion worth of stimulus plans.
It said this year's capital spending would grow by just 2.8 percent from last year, about half the 5.3 percent expansion seen in its November projection and following a 1.9 percent decline last year.
Private consumption, which generates more than half of the annual economic output, will probably grow 2.3 percent this year after a 1.7 percent gain last year.
Data from the industry ministry and the central bank showed sales at the country's top retail chains posted sharp declines year-on-year in April while household credit growth eased to a more than 8-year low by the end of March.
Early this month, the Bank of Korea cut its policy interest rate by a quarter of a percentage point to 2.50 percent, a surprise move partly seen as aimed at mitigating the upward pressure on the won after the yen's slide.
The KDI said the won would probably strengthen by between 5 percent and 6 percent on average this year in terms of the real effective exchange rate, compared with its November 2012 forecast for a rise of around 7 percent this year.
Next year, economic growth would pick up to 3.6 percent, with output growth in all categories accelerating from this year, the KDI said, compared with the central bank's latest forecast for growth of 3.8 percent. (Additional reporting by Michelle Kim; Editing by Sanjeev Miglani)