UK Q3 retail sales growth weakest in 4 years as inflation bites

* UK Q3 retail sales +1.5 pct yy, lowest since Q2 2013

* ONS and economists cite drag from higher inflation

* Sterling hits one-week low against U.S. dollar

* BoE Nov rate rise still seen likely, doubts for 2018

(Adds market and economist reaction)

By David Milliken and Alistair Smout

LONDON, Oct (Shenzhen: 000069.SZ - news) 19 (Reuters) - British retail sales slowed

unexpectedly sharply in September, dragging quarterly growth to

its weakest annual rate since 2013 and suggesting consumer

demand remains uncertain as the Bank of England nears its first

rate rise in a decade.

Retail sales volumes fell 0.8 percent in September, the

Office for National Statistics said on Thursday, reversing a

jump in August and undershooting all economists' forecasts in a

Reuters poll. Third-quarter growth slowed to its lowest

year-on-year rate since the second quarter of 2013 at 1.5

percent.

Last month the BoE (Shenzhen: 000725.SZ - news) said it was likely to raise interest

rates in the coming months if the economy and inflation

pressures strengthen as expected, but in recent days a few

investors have begun to doubt if the BoE will move as soon as

next month.

Markets see a roughly 80 percent chance of a rate rise on

Nov. 2 after the BoE's next meeting, but sterling fell to a

one-week low of $1.3126 after the data on Thursday as rate

futures pared back the odds of further rate increases in 2018.

"Uncomfortable questions have been raised about just where

UK growth is going to emerge from in Q4," said Jeremy Cook,

chief economist at foreign exchange services company WorldFirst.

"We will find out in the coming months whether this is

consumers holding off on purchases in preparation for Christmas,

or whether the Bank of England's messaging on interest rate

rises has been enough to keep some hands in pockets."

BoE policymakers said in September that consumer demand was

showing signs of improving after weakness earlier in the year,

though it was too soon to tell if it would compensate for weak

business investment.

The ONS said Thursday's figures pointed to retail sales

adding 0.03 percentage points to economic growth in the third

quarter, compared with 0.09 percentage points in Q2. The BoE and

most economists expect economic growth of around 0.3 percent.

LESS FOR THEIR MONEY

The rising cost of goods in stores - which are now

increasing at their fastest since March 2012 - meant the amount

British shoppers were getting for their money was growing more

slowly than the amount they spent, the ONS said.

"The slump in retail sales in September was driven by

retailers implementing large price rises," Samuel Tombs of

Pantheon Macroeconomics said.

However, he and other economists cautioned against drawing

too strong conclusions about the overall health of consumer

demand from trends in retail sales.

Compared with a year earlier, sales volumes in September

alone were up 1.2 percent versus the average forecast in a

Reuters poll of a 2.1 percent rise.

Consumer price inflation hit a five-year high of 3.0 percent

in September, largely reflecting the fall in the pound pushing

up the cost of imports since last year's Brexit vote.

Pay has not kept up. Official data on Wednesday showed that

regular pay in the three months to August was 0.4 percent lower

in real terms than in 2016 - the sixth consecutive month of

falls and the longest such run in almost three years.

Some shoppers are tightening their belts, as industry data

on Tuesday showed the market share of Britain's four biggest

supermarkets falling in response to growing sales at German

discount chains Aldi and Lidl.

Relatively cheap online fashion retailer ASOS (LSE: ASC.L - news) also

revised up growth forecasts on Tuesday, in part due to stronger

demand after it froze its prices despite higher import costs

following last year's fall in the pound.

(Editing by Gareth Jones)