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COLOMBO, June 12 (Reuters) - Sri Lanka's central bank will probably raise interest rates, possibly as early as this week, to prevent inflation rising following a government decision to cut subsidies and lift fuel costs, analysts said on Monday.

The government sets fuel prices below the cost of import but increased petrol and diesel prices by 5 percent and kerosene by 12 percent over the weekend to minimise losses made by the state-owned Ceylon Petroleum Corporation.

''Obviously it will have impact on inflation and most probably in turn that could result in an interest rate hike,'' said Eranjan Kulatunga, research analyst at CT Smith stockbrokers in Colombo.

The Central Bank of Sri Lanka's Monetary Policy Committee left the repurchase rate at 8.75 percent and the reverse repurchase rate at 10.25 percent -- unchanged since December -- when it last met in mid-May.

But with inflation in May hitting 13.2 percent primarily because of a fuel price hike in April, some analysts expect action when the MPC holds its next meeting on June 16.

''Interest rates would have to probably increase within the month,'' said Dushyanth Wijesinghe, Director research at Asia Securities in Colombo, predicted a 50 basis points rise.

Two other analysts including Kulatunga also forecast a rate hike, although they said they simply did not know when.

Sri Lanka produces no oil of its own and fuel retailers keep prices low with an agreement that the government will reimburse the difference later on. But finding the money has been increasingly difficult.

Last week, the government announced it had finally come to a deal with retailer Lanka IOC , local arm of Indian Oil Corp after repeatedly failing to pay an outstanding $70 million subsidy bill.

Lanka IOC had posted a seven billion rupee loss because of the unpaid subsidy and last week the firm began allowing its fuel pumps to run dry. Analysts say high international oil prices have strained official reserves.

''The government cannot continue the subsidy because it is a big drain on the governments expenditure,'' Kulatunga said.

State owned fuel retailer Ceylon Petroleum Corporation (CPC) said that it incurs a loss of 2.5 billion rupees (us $ 24.2 million ) a month because of the high international oil prices.

The ministry of finance said it would pay owners of three-wheeled auto rickshaws an additional subsidy to compensate.

($1 =103.30 rupees) REUTERS CS HS1802