* Poland's MPC expected to cut at Nov. 7 meeting by quarter
* Sources say fear over zloty, inflation will rein in easing
* MPC helped by continued growth, fiscal easing by
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
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
"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