May 14 (Bloomberg) -- China is less likely to raise interest rates after the earthquake in Sichuan province because of the need to fund reconstruction work, some economists said.

On May 12, China's central bank ordered lenders to set aside a record proportion of their deposits as reserves after inflation accelerated to close to the fastest pace in 12 years. A 7.9- magnitude earthquake the same day in Sichuan province has killed more than 12,000 people and trapped thousands under debris.

``In the coming months there will be no rate hikes,'' said Ting Lu, an economist at Merrill Lynch & Co. in Hong Kong. ``During a natural disaster policy makers will be very careful not to use aggressive policy tools.'' Before the temblor Lu expected rate increases in either May or June.

The government has used price controls, curbs on lending -- including direct instructions to banks -- and currency appreciation to try to tame inflation that surged to 8.5 percent last month. Slowing exports may also cool the economy.

``The proper policy response is to provide more liquidity, more short-term loans, to the affected individuals or enterprises so the monetary stance has to be loosened a bit,'' Kevin Lai, a Hong Kong-based senior economist with Daiwa Institute of Research, said in a phone interview.

The earthquake may make the government ``even more cautious in pursuing further macro tightening measures,'' added Denise Yam, an economist at Morgan Stanley in Hong Kong, in a report. ``Controls over bank lending could be eased earlier than expected.''

Trade Surplus

Policy makers have kept interest rates on hold this year and slowed gains by the yuan since April. They're concerned at the risk of attracting overseas capital to a financial system already awash with cash from the trade surplus and foreign direct investment.

Central bank Governor Zhou Xiaochuan said May 5 that there's a possibility interest rates will rise. A Bloomberg News survey last month showed 11 of 15 economists expected the key one-year lending rate to increase this year from a nine-year high of 7.47 percent.

Sichuan's small role in China's economy means the earthquake will have a ``marginal impact'' on growth and inflation, Wang Qian, Hong Kong-based economist at JPMorgan Chase & Co., said in a report dated yesterday.

Sichuan's Share

``Sichuan's total gross domestic product is only about 4.2 percent of the country's total GDP and industrial production is only 2.5 percent of the total production in the country,'' said Wang. ``The share of exports is even smaller in Sichuan -- less than 0.2 percent of the national exports.''

Hong Kong-based Citigroup economist Huang Yiping said the earthquake made efforts to tackle inflation more difficult.

``If inflation remains high you do need more monetary tightening to contain the spread,'' Huang said in an interview today. ``At the same time the damage means the government will have to ease on the fiscal front more aggressively to help the reconstruction.''

Ben Simpfendorfer, a currency strategist at Royal Bank of Scotland in Hong Kong, said that the quake's effect on ``inflation is a greater worry'' than its implications for economic growth. He said reconstruction work will spur demand for building materials, of which prices have already risen because of recovery work following snowstorms earlier this year.

Simpfendorfer also ruled out the chance of a rate increase ``for the time being.''

To contact the reporter on this story: Kevin Hamlin in Beijing at khamlin@bloomberg.net

Last Updated: May 14, 2008 06:38 EDT