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The Reserve Bank of Australia (RBA) says it will be closely monitoring any further pick-up in inflation as a flag to increase interest rates. In its latest Statement on Monetary Policy, released today, the RBA says while gradual tightening of monetary policy will eventually be required, it is possible it could be move sooner than later to rates. "At this stage, the board's judgement is still that this pick-up in inflation will be quite gradual, with inflation reaching 2% this year and 3% next year," it says. "Nonetheless, continued pressure on raw materials prices, evidence of capacity constraints in some sectors and reports of higher employment costs – notwithstanding the steadiness to date of aggregate series for wages – constitute a risk that this forecast could prove to be too low. "On balance, the board decided at its February meeting to leave interest rates unchanged, while noting that the likelihood of further monetary tightening being required in the months ahead had increased. "The board will continue to monitor developments over coming months and will respond as necessary to ensure that rising inflation does not jeopardise the sustainable expansion of the Australian economy." Inflation figures out last week showed a higher-than-expected increase of 0.8% in the December quarter, taking the annualised rate to 2.6%.