* Poland's MPC expected to cut at Nov. 7 meeting by quarter point
* Sources say fear over zloty, inflation will rein in easing cycle
* MPC helped by continued growth, fiscal easing by government
By Karolina Slowikowska
WARSAW, Nov 2 Following a surprise cut in interest rates in the Czech Republic and three reductions in Hungary in as many months, officials in the EU's biggest eastern economy, Poland, should finally bow to expectations and begin an easing cycle next week.
But blessed with growth that is eluding most of Europe and unburdened by the unrelenting budget austerity and market worries affecting its southern neighbours, Warsaw is likely to cut much slower than currently anticipated.
Prime Minister Donald Tusk has eased off from his budget consolidation targets and unveiled a plan to boost growth, moves that could take some pressure off policymakers to give the economy a hefty shot in the arm.
And having already defied expectations for easing for two months by saying they wanted to see more data, central bank policymakers are still not convinced that the slowdown - growth is forecast at 2 percent next year - justifies deep rate cuts.
Most members of the bank's 10-strong policy board are also worried about knocking the zloty, which would hit Polish holders of debt denominated in foreign currencies and squeeze the economy even more, according to sources close to the bank.
That could disappoint market watchers expecting the main rate to fall at least a full percentage point to 3.75 percent over the next 12 months, sources close to the bank told Reuters.
"The council is very cautious and current market expectations for rate cuts are premature and excessive," one source told Reuters.
"The council is also not interested in causing significant zloty depreciation. The zloty's stability is very important."
Poland, the only EU economy to have avoided recession since 2008, differs from its regional peers not only on the growth front, but also on how the Monetary Policy Council's policies work alongside the government's.
The Czech central bank brought its main rate down to 0.05 percent on Thursday after weeks of urging the country's notoriously thrifty consumers to spend more to help counter the European Union's longest recession outside of the euro zone.
One board member, Pavel Rezabek, complained that an austerity campaign launched by Prime Minister Petr Necas's government had thwarted the central bank's efforts.
Necas has stuck to his guns and vowed to cut the budget deficit to below the EU-prescribed level of 3 percent of gross domestic product next year despite dissent within his ruling Civic Democrat party that could topple his cabinet in a parliamentary confidence vote next week.
In sharp contrast, Polish Prime Minister Donald Tusk has eased off his austerity goals for this year and is shooting for a deficit of 3.5 percent of GDP, rather than the 2.9 percent originally planned.
He has also introduced a plan to revive sliding growth by channeling state-owned assets into a special fund that will underwrite private investment.
Not conflicting with the government's efforts gives the Polish Monetary Policy Council room to ease more slowly.
"I do not think that the situation in Poland is bad enough to justify any dramatic and deep moves by the Council," a second source close to the central bank told Reuters. "Some monetary easing is needed, but 75 basis points right now seems to be the most that can happen. I would even point to 50."
Hungary's central bank board, dominated by four board members who support Prime Minister Viktor Orban's pro-growth policies, have voted to cut rates for three straight months despite fear of accelerating inflation.
By prioritising growth, they have also ignored warnings that reducing the forint's rate premium could trigger a selloff of Hungarian bonds and currency by foreign investors, a worry that increased last month as Budapest appeared to edge away from an international aid deal that it needs to backstop itself in 2013.
This week the board cut its rate to 6.25 percent, still the highest in the European Union, a move that briefly helped send the forint down and pushed bond yields up.
Poland's central bank, which surprised markets in May by bucking a Europe-wide trend and hiking rates to tackle persistent inflation, will not take such a risk, said former MPC member Dariusz Filar.
"We need to remember the negative consequences of deep policy easing," said Filar, who sees one quarter point cut in November and another in around March. "It would hit savings levels, while the zloty falls that deep easing would entail would be bad for inflation and hit consumption."
The zloty has been relatively stable over the past few weeks, hovering around 4.10 against the euro, and even Tusk, who rarely speaks about the currency, recently said current levels were just right.
All the same, the MPC's hesitation has irked some investors and economists who say that after heady growth for most of the past decade, a slowdown to 2 percent will feel like standing still.
"There is no doubt that the central bank must act now and that it must act deeply," said Janusz Jankowiak, economist and a former adviser to the government. "But we all know that this Council won't."
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