LONDON (Reuters) - The main inflation rate unexpectedly held steady in March, official data shows, suggesting strong price pressures further up the economic pipeline have yet to be passed on to consumers.

The Office for National Statistics said consumer prices rose by 0.4 percent on the month, leaving the annual rate unchanged at 2.5 percent. Analysts had expected a monthly rise of 0.6 percent for an annual rate of 2.6 percent.

Retail price inflation, often used as a benchmark for wage bargaining, also undershot expectations. On the month, retail prices rose 0.3 percent to give an annual rate of 3.8 percent, the weakest since July 2007.

Sterling fell to a record low against the euro and interest rate futures rose as the weaker than expected figures suggested the Bank of England has room to further cut interest rates this year to shore up the economy in the wake of the credit crunch.

Policymakers, who had access to the inflation data prior to cutting rates to 5 percent last week, have voiced concern over inflationary pressures building up in the economy and have said they expect inflation to rise to around 3 percent this year.

But a steady reading in March may alleviate some of the concerns stoked by data on Tuesday showing record input price inflation and the strongest factory gate inflation in nearly 17 years in March.

"It's good news for the Bank of England although it's worth bearing in mind that they would have seen these figures before last week's rate decision," said George Buckley, an economist at Deutsche Bank.

"The weak core inflation number suggests firms are having difficulty passing higher costs to consumers."

The core annual inflation rate held steady at 1.2 percent in March.