LONDON, United Kingdom (Reuters):

Britain's inflation rate held steady in October, confounding forecasts it would accelerate to a decade-high and raising speculation interest rates have peaked.

Official data on Tuesday showed falling petrol prices offset the impact of higher university tuition fees last month, keeping the annual rate of inflation steady at 2.4 per cent.

Analysts had forecast inflation would rise to 2.6 per cent, a reading which would have been the highest since the series began in January 1997.

Sterling tumbled to a one-month low against the euro after the data as investors bet the Bank of England would be in no hurry to raise rates again.

Rates hike

Britain's central bank raised rates to 5.0 per cent last week, tightening the monetary screw for the second time since August.

"This latest data throws considerable doubt on the need for the Bank of England to raise rates any more," said Rob Carnell, economist at ING Financial Markets.

The big surprise in Tuesday's release was that university tuition fees added just 0.12 percentage points to the headline index, less than half the rate the Bank of England said it was assuming.

And the upward impact of the fees was more than offset by the fall in transport costs as petrol prices continued to ease.

"The impact of university fees was significantly less than expected," said Amit Kara, economist at UBS.

WAGE-PRICE SPIRAL

While Tuesday's numbers may provide some comfort to UK policymakers, analysts said the threat of inflationary pay rises would keep the Bank of England on its toes.

Retail price inflation, on which most pay deals are based, picked up to 3.7 per cent on October, slightly below forecast, but still the highest annual rate in more than eight years.

This could set unions on a collision course with the government which is trying to keep wage rises in line with its two per cent inflation target.

"The rise in retail price inflation maintains the risk that wage settlements could move significantly higher in the 2007 pay rounds," said Howard Archer at Global Insight. "It is far too soon for the Bank of England to relax in the war against inflation."

Inflation has been above its 2.0 per cent target for the past six months and Britain's central bank said last Thursday it could pick up further in the near term.

The fact the bank raised rates last week, even though it would have seen the inflation data in advance, also suggested to some analysts that it will continue talking tough.