20  The algorithm also puts some weight on smoothing of the interest rate path. For more information on COMPASS, see Burgess et al (2013). BIS central bankers’ speeches  17  Chart 29: Simulation of Bank rate and CPI inflation Path for Bank rate  CPI inflation  Per cent 1.5  Per cent 3 2.5  1  2 1.5  0.5  1 0  2013  2014  2015  2016  2017  -0.5 2013 2018  0.5 2014  2015  2016  0 2018  2017  February IR Simulation with a lower bound at 0% Simulation with a lower bound at 0.5%  February IR Simulation with a lower bound at 0% Simulation with a lower bound at 0.5%  Source: ONS and Bank Calculations. Simulations show optimal policy under full commitment. Were downside risks to inflation to materialise, this case is strengthened. Chart 30 shows the optimal policy paths if we assume the starting level of slack is larger in line with Chart 18. The interest rate path now implies that rates should be cut and held at their lower bound for longer. This alternative policy path returns output and inflation to target sooner, at the cost of a more significant over-shoot.
Chart 16: IMF estimates of global price Phillips curve slopes Interquartile range  Median 2.0  1.5  1.0  0.5  0.0 1961 1967 1974 1980 1986 1993 1999 2006 Sources: IMF (2013). Chart 17 shows the results from this exercise. Wages and prices are both weaker throughout: at the two-year horizon, wage growth is 0.6 percentage points lower than in the February Inflation Report, while inflation is 0.2 percentage points lower. In other words, a flatter Phillips curve would generate a downside risk to the inflation outlook at the policy horizon. A final explanation for the wage puzzle is that weak wages are signalling that the output or unemployment gap is larger than currently estimated. There are a number of potential sources of such additional slack, including greater spare capacity in firms, a greater willingness among workers to increase their average hours, or a lower long-term rate of unemployment than is currently estimated by the Bank.10 How much additional slack? Imagine you asked yourself how much slack would be needed to resolve the wage puzzle of the past few years. Even with a very conservative estimate of the Phillips curve slope, the implied degree of slack could be somewhere close to 4%, materially above the MPC’s current central view of slack of around ½%.