I had an interesting exchange with Malcolm Barr at JP Morgan via email. He made two points that were food for thought.
Both are aimed at finding ways to minimise the risk that a rise in the inflation target was interpreted as an old-fashioned fiscal measure, or a losing of heart to control inflation as against other things that those pressuring policymakers are concerned about.
Recall that the real motive for raising the target is to improve macroeconomic stabilisation – including inflation control – by making sure the interest rate hits the zero bound less often.
The first comment was that ideally the inflation target rise would be done in a coordinated fashion, internationally. Most developed countries settled on 2% before the crisis. If all moved to 4%, say, at the same time, this would increase the chance of observers buying the economics behind it, and not concluding that the UK was just a basket case country. It would also minimise the chance of an exchange rate adjustment when the inflation target was announced.
A second point Malcolm made was about whether compensation might be devised for holders of gilts who had bought expecting only 2% inflation. So that there was no chance of inferring there was a direct fiscal benefit from an inflation surprise.
Thinking this through would be tricky.
There are also benefits to gilt holders to consider, like the reduction in inflation uncertainty coming from making room at the zero bound. [Although from the perspective of investors the inflation target rise might increase uncertainty]. One option – appropriate if the bond market delivered faithful judgements – would be to let the price reaction to the news determine the net cost/benefit. But that assumption is obviously somewhat heroic.