By Edmund Conway Published: 8:59PM BST 17 Oct 2009  The report says that sterling could continue to weaken until 2014, as foreign investors balk at the unprecedented size of the UK's budget deficit.  Britain is also likely to save more to protect it from future shocks, according to Professor Peter Spencer, the institution's chief economic adviser.  He said the upshot of the shift from spending would be to depress the value of the pound for a long period of time, rather than the temporary blip many foreign exchange experts anticipate. He said that this was also in part due to the fact that with the economy likely to remain weak for an extended period of time "interest rates will be pinned to the floor".  "Sterling will remain very weak," he said. "On the basis of our forecasts, we are likely to hit parity with the euro, and until the public sector deficit is sorted out – which is not possible in a single parliament – and until the household sector has also got its balance sheet into order, the pound has to remain where it is."  The forecast does not entail a full-blown sterling crisis of the kind many in the market fear. It is instead based on the behaviour of the economy and the extent to which that attracts inflows of cash from overseas or not. However, should confidence in Britain's politicians and policymakers' ability to bring the UK's budget deficit back into order fail, the prospect of a full-scale crisis cannot be ruled out.  The pound has fallen by more than a quarter against the euro and a similar amount against the dollar since the onset of the crisis two years ago.  The Bank of England has thus far regarded the currency's fall as benign, pointing to the boost it will provide for the economy, as exports are supported and industries such as the domestic tourism sector benefit.
The pound will be stuck at near-parity against the euro for up to four years,    according to a report from Ernst and Young Item Club.