The economy is overheating, prompting aggressive monetary tightening to steer inflation back to the official target. With huge external deficits and debt levels, waning capital inflows as the large-scale investment projects gear down could lead to a reversal of the substantial currency appreciation in recent years, the first signs of which may already be seen. This could entail a protracted period of high interest rates and possibly a full-blown recession, as happened following the previous overheating period in 2002.

Further interest-rate increases will probably be needed to forestall a wage/price spiral. Now that tax cuts have been passed, the government should aim at budget surpluses higher than those currently planned to ensure a better policy mix. This should involve additional spending restraint and reductions in tax expenditures favouring the booming housing sector.