* UK business activity holds up in Q3 but still muted: BCC
* Business group says "extraordinary" for BoE to plan rate hike
* Pay pressures weak, investment intentions muted
* Economists see Nov rate hike, but warn BoE risks policy error
(Adds graphic, reaction, bullet points) LONDON, Oct 13 (Reuters) - Britain's economy shows little sign of improving on lacklustre growth and it seems "extraordinary" that the Bank of England is considering raising interest rates, the British Chambers of Commerce said on Friday. The BCC's Quarterly Economic Survey of businesses, the largest of its kind, said sales at services firms that make up the bulk of the economy were steady in the third quarter. But there was little pick-up in pay pressures or investment, both of which the BoE expects to rise markedly next year. Overall the BCC described the survey as "uninspiring", with political uncertainty, currency fluctuations and Brexit clearly affecting British businesses. Despite confounding forecasts that the 2016 vote to leave the European Union would lead to a sudden slowdown, Britain's economy has struggled this year, posting its worst first-half performance since 2012. The BCC said price pressures in companies, while high historically, looked likely to peak soon. "Against this backdrop, it seems extraordinary that the Bank of England are considering raising interest rates," said Suren Thiru, BCC head of economics. In September the BoE said interest rates would probably rise "in the coming months" if the economy continued to grow and price pressures kept building.
INFLATION The BCC survey suggested that business activity was probably strong enough to absorb slack in the economy - one of the BoE's markers for raising rates soon, JPMorgan economist Allan Monks said in a research note. "Another marker, however, was to see underlying inflation pressures building. But the pay settlements reading of the BCC remained close to a record low in (the third quarter)," Monks added. A majority of economists polled by Reuters think the BoE will move at its next meeting in November - but most also said it would be a mistake to act now. Unlike the larger services sector, manufacturers enjoyed both better domestic and export sales over the past three months, the BCC said. While gauges of confidence in turnover and profitability stood at their highest levels since 2015, the survey pointed to only a marginal improvement in manufacturers' investment intentions. A slightly larger proportion of manufacturers said they expected to raise prices, but this was mostly down to the cost of raw materials rather than pressure from pay settlements. In the services sector, a net 15 percent of firms reported that pay was putting pressure on prices - up just a percentage point from the five-year low struck in the second quarter. Other surveys, including one from the BoE's regional advisers, have pointed to similar weakness in corporate pay intentions.
(Editing by Gareth Jones)