Black Wednesday 1992: the day sterling left the ERM

1. 8 Oct 1990The United Kingdom joins the ERM at a central rate of 2.95 marks to the pound, with a band of 6% either side.
2. 1990–92After reunification the Bundesbank keeps German interest rates high. The United Kingdom, in recession, has to keep its own rates high to hold the pound in its band.
3. 2 June 1992Danish voters reject the Maastricht Treaty. Doubt spreads about monetary union and about the ERM’s existing rates.
4. 8–14 Sept 1992Finland abandons its currency’s link on 8 September. At the weekend of 12 and 13 September Italy devalues the lira within the ERM. Sterling falls to the bottom of its band.
5. 16 Sept, morningThe Bank of England buys sterling heavily. Late in the morning the government announces a rise in interest rates from 10% to 12%. The pound does not move off its floor.
6. 16 Sept, afternoonA second rise, to 15%, is announced to take effect the following day. Selling continues.
7. 16 Sept, eveningThe Chancellor of the Exchequer announces that sterling’s membership of the ERM is suspended. The pound is left to float and falls.
8. 17 Sept 1992Interest rates go back to 10%; the rise to 15% never takes effect. Italy also takes the lira out of the mechanism.
9. October 1992The government adopts a published inflation target as the new basis for monetary policy.
10. May 1997The Bank of England is given operational independence to set interest rates.

• In October 1992 the United Kingdom adopted an explicit inflation target in place of an exchange-rate target. Inflation targeting later became the usual framework for central banks in many countries.
• In May 1997 the Bank of England was given operational independence to set interest rates, through its Monetary Policy Committee.
• The ERM itself was loosened in August 1993, when most of its bands were widened to 15% either side after further pressure on the French franc.
• The pound never rejoined. The Treasury later estimated the cost of the defence in billions of pounds.

• A peg holds while the country is willing and able to pay for it. On the day, the market judged that a country in recession would not keep interest rates at 15%, and it was right.
• Defending a floor gives sellers a known price to sell at. A central bank buying its own currency at a fixed rate is on the other side of every such sale until its reserves or its resolve run out.
• A pegged rate can look calm for a long time and then move a long way at once. The absence of movement was a policy, not a property of the currency.
• Raising interest rates did not help once the peg was no longer believed. A defence that is not credible can speed the result it was meant to prevent.

These are observations about how markets and rules work, drawn from one episode. They are not advice, and they do not say that anything like it will or will not happen again.

It is easy to judge an episode once its ending is known. This exercise takes three moments from the timeline above, one at a time. At each it shows only what had been made public by then, asks a hypothetical question with three plain choices, and then shows what came next and what each choice would have meant.

The text headed “what had been made public by then” is this site’s own summary of the record, written afterwards. It is not a contemporary document and nothing in it is a quotation. The position described is imagined. No choice is marked right, there is no score, and nothing is stored.

A hypothetical for study, not advice. It does not say what anyone should have done then, or what to do now.

The interest rates, dates and the ERM central rate are a matter of public record. The cost of the day’s intervention is an estimate and depends on how it is counted, so no figure is given here. Much is written about the profits of particular funds; those accounts are not needed to understand what happened and are left out. Whether leaving the ERM was a disaster or a release is a matter of opinion: the economy recovered in the years that followed, and the political cost to the government of the day was severe.

What happened on Black Wednesday?

On 16 September 1992 sterling came under heavy selling and fell to the floor of its band in the European Exchange Rate Mechanism. The Bank of England bought pounds and the government announced interest rate rises from 10% to 12% and then to 15%. Neither worked, and that evening the government suspended sterling’s membership of the mechanism.

What was the ERM?

The Exchange Rate Mechanism was an arrangement begun in 1979 under which European currencies were held within agreed bands against one another. Central banks were obliged to keep their currencies inside the bands by intervening in the market and by adjusting interest rates. It was a forerunner of the euro.

Why could the UK not stay in the ERM?

Staying in required interest rates high enough to hold the pound against the German mark at a time when German rates were high and the British economy was in recession. Markets doubted that the government would sustain that, sold sterling in very large amounts, and the reserves and the rate rises used to resist them were not enough.

• Central Bank
• Monetary Policy
• Inflation
• Volatility
• Gap

Bank of England and Treasury accounts of the episode, including Treasury papers released later, and contemporary newspaper reports.

A number is given on this page only where it is famous and certain. Nothing here is a quotation.