(Adds market and economist reaction) LONDON, Nov 14 (Reuters) - British inflation unexpectedly held stable in October, wrong-footing the Bank of England which had forecast it would increase further and raising questions about how fast the Bank will raise rates in future. Consumer price inflation was unchanged from September's five-and-a-half-year high of 3.0 percent, official data showed on Tuesday. When the BoE raised benchmark borrowing costs 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. Sterling fell against the dollar after the data and British government bond prices rose, as markets lengthened the odds on the BoE following up this month's hike with another one in the foreseeable future. "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. "Today's numbers will dampen expectations on whether we will see further rate hikes any time soon." British inflation 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. Tuesday's data spared BoE's governor Mark Carney the embarrassment of having to write to finance minister Philip Hammond to explain how the BoE missed its 2 percent inflation target by more than a percentage point. But the figures will add to criticisms from many economists who said this month's rate rise was unnecessary against a backdrop of a slowing domestic economy and weak productivity and wage growth. With the worst of the Brexit impact on prices now past, the critics of the BoE decision saw little need to raise rates at a time when Britain's future trading relationship with the EU remains highly uncertain.
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 labor shortages and a rebound in wage growth a risk. It has said it still expects inflation to be slightly above target in three years' time. 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." A measure of retail price inflation, used to calculate payments on government bonds and many commercial contracts, hit a near six-year high of 4.0 percent, providing bad news for Hammond who is due to announce a budget plan on Nov. 22. But other data showed that some underlying price pressures are easing. Costs of manufacturers' raw materials - much of them imported - were 4.6 percent higher than in October 2016, down from an increase of 8.1 percent in September. This was the lowest rate of producer input price inflation since July 2016, a month after the Brexit vote.
(Reporting by David Milliken; editing by John Stonestreet)