Measures of underlying inflation remain below the RBA’s target band of 2 - 3 per cent. Although monetary policy settings in Australia are expansionary, the recent increase in commodity prices together with expansionary monetary policy in the United States have contributed to a significant appreciation of the Australian dollar in recent months. A stronger Australian dollar will reduce inflation further through a reduction in non-tradable inflation. With inflation persistently below target and slack in the labour market there is a risk that long-run inflation expectations become anchored at a permanently lower level. Monetary policy must therefore increase the degree of policy accommodation by extending the duration of its zero interest rate policy.