Activity has been very strong over the past four years. Most recently, buoyancy due to immigration has outweighed the negative impulse from an appreciating exchange rate. This has left productive resources stretched. Rising house prices are providing further impetus to domestic demand. However, the pace of activity should soon cool to more normal rates of growth. The moderate headline inflation rate reflects the net outcome of falling import prices and high domestically-generated inflation. On current monetary policy settings, these factors are likely to continue balancing out and inflation should remain under control. The budget surplus has been surprisingly large, but the government should continue to exercise caution in raising expenditure until the evidence is clear that the revenue surprise is permanent...