June 29 (Bloomberg) -- China's 2007 economy may expand at the fastest annual pace in 12 years while inflation surpasses the government's target, according to an economic forecast today by the country's central bank.

Gross domestic products may grow 10.8 percent this year, the fastest pace since 1995, the People's Bank of China said in a research report published today in the state-owned China Securities Journal newspaper. Consumer price index may accelerate to 3.2 percent, topping the government's 3 percent target and the fastest pace since 2004.

The forecast underscores the ``moderate tightening'' Chinese Premier Wen Jiabao said the economy needs, as two interest rate increases this year failed to slow growth in the world's fourth- largest economy. Record trade surpluses have pumped money into the financial system, fueling an economic expansion of 11.1 percent in the first quarter and raising concern about inflation.

``The Chinese economy's still firing on all cylinders,'' said Tai Hui, Standard Chartered Plc's economist in Hong Kong. ``These numbers suggest that real interest rates may be even lower than expected, highlighting the need for higher rates,''

China's economy expanded 10.7 percent in 2006 while the consumer price index accelerated by 1.5 percent.

Rising food prices, including the soaring costs of meat, eggs and cooking oil, will add 73.5 percent to accelerating consumer price index, the People's Bank of China said. Real estate prices jumped at the fastest pace since 2006, the central bank said.

Production and transportation costs increased this year, causing the price of ferrous metals to increase, the central bank said. China's steel exports more than doubled in the first five months of 2007 to 27.44 million tons while imports fell 6 percent to 7.28 million tons. The surge in exports led to a decline in domestic supply, boosting prices, the central bank said.

The international price of iron ore rose 30 percent this year, pushing up the production of Chinese steelmakers, the central bank said.

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Last Updated: June 28, 2007 21:37 EDT