The pound hit a five month low against the euro today after the Bank of England raised the prospect of a prolonged fall in the value of sterling against other currencies as a result of the credit crisis.

In its Quarterly Bulletin, the Bank tried to explain the reasons for the collapse in value of sterling since the final quarter of last year. It said: "It is possible that sterling's depreciation may be part of a more prolonged process of rebalancing of the UK economy, generating a fall in the long-run sustainable real exchange rate."

It pointed out that Britain has run current account deficits, financed by foreign investors buying British assets, since the mid-1990s. The financial crisis, however, may have forced those overseas investors to look elsewhere.

"The financial crisis may have led overseas investors to reasses their willingness or ability to purchase sterling assets and thereby finance the UK trade deficit. As a result, the long-run sustainable real sterling exchange rate ... may have fallen."

It also said that the Bank's programme of asset purchases - quantitative easing - may be having an effect. "Sterling will tend to depreciate if this policy causes portfolios to be balanced away from UK assets."

The Bank said: "There are several reasons why market participants might perceive that the financial crisis has prompted a fundamental shift in demand away from UK goods and services."

It said that Britain's higher dependence on financial services could have driven a permanent fall in the incomes of companies and households, while the global credit crisis could have caused a persistent fall in the global demand for financial services.

The euro rose 0.2 per cent against sterling to 90.79p, its highest since late April.

Against the dollar, it was down 0.6 per cent at $1.6175, near its weakest level in nearly three weeks.

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