Steady UK inflation leaves question mark over BoE rate action

* CPI unchanged at 5-year high of 3.0 pct in October

* BoE (Shenzhen: 000725.SZ - news) had expected inflation to peak at 3.2 pct

* Sterling drops, bond prices rise on doubts over rate rises

* Factory raw material price inflation lowest since July

2016

(Adds detail, economist reaction)

By David Milliken and Jonathan Cable

LONDON, Nov 14 (Reuters) - British inflation unexpectedly

held steady in October, wrong-footing the Bank of England and

raising fresh questions about how fast the central bank will

follow up on this month's interest rate hike.

The annual rate of consumer price inflation was unchanged

from September's five-and-a-half-year high of 3.0 percent,

official data showed.

When the BoE raised rates for the first time in a decade in

early November, it said it expected inflation would hit 3.2

percent in October before starting to fall slowly towards its 2

percent target.

"Red faces all round as UK inflation fails to rise as widely

expected, not least by the Bank of England," said Chris

Williamson, chief business economist at financial data company

IHS Markit (Stuttgart: A1139A - news) .

Sterling fell against the dollar and British government bond

prices rose as markets lengthened the odds slightly on a new BoE

rate hike in the foreseeable future.

Most economists polled by Reuters after the Nov. 2 rate rise

said they did not expect the BoE to raise rates again until

2019. On Tuesday financial markets - which tend to take a more

hawkish view - priced in no increase until late 2018.

While inflation in many developed countries remains weak, in

Britain it has surged from just 0.5 percent at the time of the

June 2016 vote to leave the European Union as the fall in the

pound pushed up the cost of imported goods.

October's data showed that lower fuel price inflation was

offset by the biggest rise in food prices since September 2013.

Many economists have said this month's rate rise was

unnecessary because of the slowing domestic economy, weak

productivity and wage growth, and uncertainty about Britain's

future trade relationship with the EU.

Economists polled by Reuters expect wage data due on

Wednesday to show pay growth stuck at just over 2 percent.

DATA DILEMMA

The Bank argues that leaving the EU will damage Britain's

ability to grow as fast as before without generating excess

inflation, and that the lowest unemployment rate since 1975

makes labour shortages and a rebound in wage growth a risk.

This month's rate rise was not aimed at directly curbing the

recent surge in inflation but at ensuring above-target inflation

does not become too entrenched in Britain, especially as the

United States and euro zone begin to tighten monetary policy

which could further weaken the pound.

The BoE has said it still expects inflation to be slightly

above target in three years' time. On Tuesday Carney reiterated

that he was allowing inflation longer than normal to return to

target due to the Brexit uncertainties.

Paul Diggle, a senior economist at Aberdeen Asset

Management, said inflation would pick up again due to rising oil

prices and residual effects of the weaker pound.

"The Bank of England is stuck between a rock and a hard

place. On balance, we think (it) will have to hike interest

rates at least once more next year."

Retail price inflation, a measure used to calculate payments

on government bonds and many commercial contracts, hit a near

six-year high of 4.0 percent, bad news for Hammond who is due to

announce a budget plan on Nov. 22.

But other data showed that underlying price pressures are

easing. Costs of manufacturers' raw materials rose at their

slowest pace since July 2016, a month after the Brexit vote.

"Our baseline case is that CPI inflation has now topped

out," Investec (LSE: INVP.L - news) economist Philip Shaw said.

(Reporting by David Milliken; editing by John Stonestreet and

William Schomberg)