In his speech in Northern Ireland this evening, Sir Mervyn King has set the cat among the pigeons with this: "It would be sensible to review the arrangements for setting monetary policy."
Was he arguing for dropping the 2% inflation target? No, but he was arguing that it should be interpreted flexibly. He went on to say:
"Our current remit does not specify how the MPC should strike a balance between growth and inflation in the short run. The horizon over which inflation should come back to target is effectively delegated to the MPC.
"But should the MPC itself choose how quickly to bring inflation back to target, or should the government use its annual remit to set that horizon? Is there a gain from trying to quantify how the MPC should manage the trade-off between growth and inflation in the short run? The recent guidance by the Federal Reserve about the conditions under which it would continue to hold interest rates at close to zero is a way of quantifying the “flexibility” in flexible inflation targeting. It describes how the Federal Reserve will interpret its freedom to balance its twin objectives for employment and inflation. How much discretion to give to the MPC and how much should remain with the Chancellor is an interesting question that was raised, but not fully resolved, in 1997 with the system of open letters which gives the Chancellor the opportunity to comment on the horizon over which the MPC plans to bring inflation back to target. So there are certainly aspects of the inflation targeting regime to consider."
But then he said: "To drop the objective of low inflation would be to forget a lesson from our post-war history. In the 1960s, Britain stood out from much of the rest of the industrialised world in trying to target an unrealistic growth rate for the economy as a whole, while pretending that its pursuit was consistent with stable inflation. The painful experience of the 1970s showed that this illusion on the part of policy-makers came at a terrible price for working men and women in this country. The battle to bring inflation expectations down was long and hard, and involved persistently high levels of unemployment. Wishful thinking can be indulged if the costs fall on the dreamers; when the costs fall on others, it is unacceptable. So a long-run target of 2% inflation should be an essential part of our macroeconomic framework."
So keep the inflation target but allow policymakers flexibility. The speech is here.