Czech central bank chief bids farewell with 125-bps rate hike

* Central bank delivers 125 bps hike

* Borrowing costs at 23-year high, inflation fastest in 29 years

* Bank says FX interventions a supplementary policy tool

* Rate hike may be last as incoming governor pledges stability

By Jan Lopatka

PRAGUE, June 22 (Reuters) - The Czech National Bank delivered one of the biggest interest rate hikes of its year-long tightening drive on Wednesday as it battles inflation at a nearly three decade high while also backing continued market interventions to buck up the crown.

The 125-basis-point rate hike - which took the key two-week repo rate CZCBIR=ECI to 7.00%, the highest since 1999 - could be the last of a series of hikes going back to last June, although markets bet that more tightening may come even with a leadership change at the bank.

The decision is the parting shot of Governor Jiri Rusnok and two other hawkish members of the seven-strong board who leave this month. Incoming Governor Ales Michl, a current board member who has opposed the tightening drive, has viewed inflation as mainly supply side-driven and has pledged to propose a period of stability.

The bank has lifted its base rate by a total of 675 basis points, and Rusnok said on Wednesday the most recent hike was in response to a marked rise in inflation pressures.

"Restoring price stability soon is now the Czech National Bank's absolute priority," he said.

The board also decided to continue backing a strategy of market interventions, he said, to keep undesired weakening of the crown from driving up inflation pressures.

The bank first launched interventions to halt a sharp drop in the crown after Michl's nomination in May raised worry of dovish shift in the board. But they have continued as the crown and other central European currencies come under pressure now that major central banks like the U.S. Federal Reserve have resorted also to rate hikes.

"The current bank board is by all means for using the exchange rate at this moment as a supplementary tool in the fight against inflation," Rusnok said.

Analysts in a Reuters poll had been largely split on whether the bank would opt for a 100- or 125-basis-point hike. Markets had priced in a 150-basis-point move.

The crown EURCZK= sagged 0.1% on Wednesday, trading at 24.720 per euro, inside a range it has stuck to in recent weeks and weakening far less than peers like the Polish zloty EURPLN= or Hungarian forint EURHUF= .

The world's major central banks have turned more hawkish since the Czech central bank's last macro outlook in May. The crown has also been weaker than assumed by the bank.

Headline inflation hit 16% in May, more than a percentage point above the bank's forecast and the highest since 1993.

This has markets pricing in chances of another 25 basis point hike in August or September.

And while many analysts see the end of tightening now, some say rate hikes will stay on the table or that the bank's next staff forecasts for the Aug. 4 board meeting - the first chaired by Michl - will call for more tightening.

"The question is if this stance (toward stability) would stay valid with a significantly higher June inflation reading or inflation expectations becoming unanchored," Raiffeisen analysts said.

Reporting by Jan Lopatka, Robert Muller, and Jason Hovet Writing by Jason Hovet Editing by Alison Williams

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