"Extraordinary" for BoE to mull rate hike as economy struggles, BCC says

* UK business activity holds up in Q3 but still muted: BCC (Shenzhen: 002455.SZ - news)

* Business group says "extraordinary" for BoE (Shenzhen: 000725.SZ - news) 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)

By Andy Bruce

LONDON, Oct (Shenzhen: 000069.SZ - news) 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 (LSE: JPIU.L - news) 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)