Black Wednesday, 16 September 1992: how sterling crashed out of the ERM

Black Wednesday is the name given to 16 September 1992, the day the United Kingdom was forced to take sterling out of the European Exchange Rate Mechanism (ERM). It remains one of the best-known examples of a government losing a battle with the currency market, and it changed how UK monetary policy is run.

The ERM and sterling's entry

The ERM was part of the European Monetary System. Member currencies were kept within bands around central rates against each other, with the Deutsche Mark as the anchor in practice. The UK joined in October 1990 at a central rate of 2.95 Deutsche Marks per pound.

Why the peg came under pressure

German reunification in 1990 brought large budget deficits. The Bundesbank, committed to price stability, raised interest rates to contain inflation. Other ERM members then had to keep their own rates high to hold their currencies within the bands, even when their economies needed the opposite. The UK was in recession, and high rates were hurting its housing market and growth. Markets began to doubt the government would keep paying that price, and hedge funds, most famously George Soros's Quantum Fund, built large bets against the pound.

The day itself

On 16 September, the Bank of England bought pounds in large amounts and the government raised interest rates from 10% to 12%, then announced a further increase to 15%. Neither stopped the selling. That evening, the Chancellor of the Exchequer, Norman Lamont, announced that sterling's membership of the ERM was suspended, and the rise to 15% never took effect. The pound floated and fell sharply in the weeks that followed.

Writing for the Economics Observatory, economic historian John Turner puts the Bank of England's intervention at about $22 billion.

What changed afterwards

• Inflation targeting. Within weeks, the UK adopted an inflation target, initially a range of 1–4% for retail price inflation excluding mortgage interest payments.
• Bank of England independence. In May 1997 the Bank was given operational independence to set interest rates, the system that still runs today with a 2% inflation target set by the government (inflation targets).
• A lasting lesson. A fixed exchange rate is only as strong as a government's willingness to bear its costs. When markets believe those costs have become too high, the pressure can overwhelm large reserves. The same logic appears in the Asian financial crisis and the Swiss franc shock of 2015.

For how central banks defend currencies, see currency intervention explained. Sterling's live price is on the GBP/USD page.