It appears that the split was triggered by the popularity of the cryptocurrency. As the number of transactions increases, inbuilt limitations in the system are turning into hurdles.

Currently, the Bitcoin network has a limit of 1 mb block of transactions every 10 minutes, with a plan to scale Bitcoin by evolving it into a settlement network containing only large transactions.  For smaller transactions, there will be a network of payment hubs run by organisations or individuals that settle on the blockchain; called the ‘lightning network’.

Mustafa Al-Bassam, security expert at Secure Trading and also a reformed ex-hacker, says, “While the breakaway plan is argued to be more aligned to the vision of Bitcoin’s original creator and potentially more safe as it doesn’t include a controversial feature to move the digital signatures of transactions off the ledger, it arguably risks the blockchain – the ledger containing every transactions – growing too big.  This will mean that fewer people have the storage space required to run a full Bitcoin client, which may cause Bitcoin to become more centralised, as only organisations with a large amount of resources will be able to store the entire ledger.

“For merchants, if Bitcoin Cash is very successful, there could be a short term reduction in transaction capacity in the current network, as miners shift their hardware to process Bitcoin Cash transactions.  To cope with the security implications of this, merchants accepting Bitcoin should temporarily increase the number of confirmations they require before they accept a transaction.  That said, there is unlikely to be any major disruption for a while, due to the fork.

“On the whole, the fact that there is disagreement and the freedom to offer a breakaway plan is positive.  While it is still a highly experimental and volatile system, the market is being allowed to determine which version of Bitcoin is more valuable – and this is an important precedent to set.”

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August 21, 2014: The minutes of the Bank of England monetary policy meeting on August 6-7 showed that the committee voted 7-2 in favour of keeping Bank Rate at 0.5% with Martin Weale and Ian McCafferty voting for a 25bp interest rate rise. This is the first time that there wasn’t a unanimous decision in just over three years. The committee voted 9-0 in favour of leaving QE at £375bn.

The two dissenters argued that “the degree of spare capacity had diminished sufficiently” and that a tightening labour market “created a prospect that wage growth would pick up”. They also noted that wages were a lagging indicator and “it was desirable to anticipate labour market pressures by raising Bank Rate in advance of them”. Even after a 25bp rate rise, they argued that “monetary policy would remain extremely supportive”. It would also help facilitate the MPCs “aspiration that the rises in Bank Rate should only be gradual”.

However, the majority still need a fair bit of convincing. The minutes stated that “for most members, there remained insufficient evidence of inflationary pressures to justify an immediate increase in Bank Rate”. They felt that the rate of growth would moderate while inflation was expected to “reach the 2% target only at the end of the three-year forecast period”. They also cited weak wages and the possibility of labour market slack may have been greater than previously thought. By delaying rate hikes, it would “allow the expansion to become more entrenched”. Indeed, raising rates too early in the absence of wage rises could increase “the vulnerability of highly indebted households”, while also adding to upward pressure on sterling.

We suspect that Weale and McCafferty will remain in the minority for a while yet. The low inflation numbers, the lack of wage growth and concerns about Eurozone growth – the UK’s largest trade partner – suggest that in the absence of upside activity data shocks, the majority will continue to opt for status quo in the next few months. Indeed, it currently looks more likely to be February when we see the first rate rise than our current published forecast of November.

Nonetheless, we think that the market is being too cautious in terms of potential policy tightening. The MPC-dated Sterling Overnight Interbank Average Rate (SONIA) forward is currently pricing in around 19bp of tightening by the February MPC meeting and just 38bp by June. We would suspect the BoE would likely be raising rates by 25bp a quarter which would put June at 50bp. As such, we remain upbeat on the prospects for sterling, particularly against the euro, given little prospect of ECB policy tightening within the next 18 months. We look for EURGBP to fall to 0.78 by year end.

ING

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