The Reserve Bank of Australia should continue to increase the cash rate and do so until inflation moderates. Underlying measures of inflation are currently running close to 5 per cent in year-ended terms. The Federal Reserve in the United States has increased its policy rate at a faster pace than the RBA which has contributed to a weaker Australian dollar. The depreciation of the exchange rate will add to inflationary pressures at home through further increases in tradable goods prices. Although inflation has been surprisingly (and persistently) high, inflation is likely to moderate over the medium term (1 to 2 years), as suggested by the yield curve. But this expectation is predicated on monetary policy responding to the increase in inflation. Because the real rate of interest at the short-end of the yield curve remains quite negative, the stance of monetary policy continues to be expansionary. And considering that the rate of unemployment is at a historically low level, the cash rate has to increase.