On Wednesday 16 September 1992, the Bank of England spent about $22 billion of its reserves in a few hours trying to hold up the pound. The figure comes from the economic historian Alain Naef, in his 2022 history of sterling. It was not enough. That evening, the government took sterling out of the European Exchange Rate Mechanism (ERM).
The day became known as Black Wednesday. Here is what the ERM was, why the pound could not stay in it, how the day unfolded and what George Soros's fund made. It ends with what came next: lower interest rates, a cheaper pound and Britain's first inflation target.
What was Black Wednesday? Black Wednesday was 16 September 1992, the day the UK pulled the pound out of the European Exchange Rate Mechanism (ERM). The ERM tied the pound to the Deutsche Mark. The pound could not be held above its agreed floor.
UK interest rates went from 10% to 12% that morning. A rise to 15% was announced for the next day, then withdrawn that evening. Neither move lifted the pound.
The UK Treasury later put the cost of defending the pound at £3.3 billion. George Soros's Quantum Fund was reported to have made about $1 billion.
Within weeks the UK set its first inflation target, a range of 1% to 4%. Inflation stayed inside that range in every month from October 1992 to April 1997.
What was the Exchange Rate Mechanism?
An exchange rate is the price of one currency in another, as How Exchange Rates Work explains. Most of the time, buyers and sellers set it.
The ERM was a European system that held member currencies close to fixed rates against each other. Each pair had a central rate, plus a top and a floor. When a currency hit its floor, central banks had to buy it, using their reserves of other currencies.
The UK joined on 8 October 1990. Its central rate was DM2.95, meaning 2.95 Deutsche Marks (DM), Germany's currency, for £1. The pound could move about 6% either way, between a floor of DM2.7780 and a top of DM3.1320.
Source: Bank of England; YX Insights
Chart 1 shows the pound against the Deutsche Mark, with the central rate and the floor. In the ERM, the pound closed below the central rate on 84% of trading days. On 16 September 1992 it closed at DM2.7784, just above the floor. Within months it had fallen far below it.
Why did the pound come under pressure in 1992?
The Bank of England's own account of the crisis, in its Quarterly Bulletin, names three pressures:
German interest rates. Reunification pushed up German government spending and inflation. Germany raised its interest rates in response. The ERM stopped the UK cutting its rates below Germany's.
A weak UK economy. The economy, measured by Gross Domestic Product (GDP), shrank 1.4% in 1991 and grew 0.3% in 1992. We explain the measure in What Is GDP?
A French vote. France was to vote on 20 September on the Maastricht Treaty, which set out plans for a single European currency. Polls cast doubt on a yes.
Membership had helped at first. Over the first 18 months, UK base rates, the rates banks lend at, fell from 15% to 10%. By the summer of 1992, the UK economy was still not recovering, while Germany raised its rates again in July.
The Italian lira was devalued on 14 September. The Bank of England's account then cites comments attributed to the head of Germany's central bank, the Bundesbank.
The comments doubted the pound's rate. They were later denied. By then, pressure on the pound had come to a head.
What happened on 16 September 1992?
The Bank of England's account gives the timeline:
Morning. The pound fell to its floor against the Deutsche Mark. The Bank bought pounds in very large amounts.
11.00am. The Bank set its Minimum Lending Rate, the rate at which it lent to the money markets, at 12%. Banks raised their base rates from 10% to match.
2.15pm. A rise to 15% was announced, to start the next day. The pound stayed at its floor.
Just after 7.30pm. Norman Lamont, the Chancellor of the Exchequer, announced that sterling's ERM membership was suspended. He cancelled the rise to 15%.
The next morning, the rate went back to 10%. On 18 September, the pound closed at DM2.6100, 6% below its old floor.
Higher interest rates can draw money into a currency, because deposits in it pay more. A central bank can raise its rate in a day, as What Does the Fed Do? shows for the US. On Black Wednesday, one rise and the promise of a second did not stop the selling.
How much did Black Wednesday cost?
Treasury papers were released under the Freedom of Information Act on 9 February 2005. They gave the Treasury's best estimate of the cost as £3.3 billion, according to The Guardian and the journal Central Banking. Earlier guesses had run from £13 billion to £27 billion.
Spending reserves is not the same as losing them. The loss came from the pound's later fall. The Bank sold foreign currency from its reserves to buy pounds at about DM2.78. The pound then fell well below that, so the pounds it bought were worth less.
The Treasury reached its figure by comparing the reserves' value with what they would have been worth with no intervention.
How did George Soros make money on Black Wednesday?
George Soros ran the Quantum Fund, a hedge fund. We explain what a hedge fund is in What Is a Hedge Fund?
Through the Quantum funds, Soros sold billions of pounds in the days before the devaluation. Much of the trade was funded with borrowed money, according to the Encyclopaedia Britannica. After the pound fell, he bought pounds back for less. His profit was reported at about $1 billion.
Britannica records his nickname from the trade: "the man who broke the Bank of England."
Soros was not alone. The Guardian describes the Quantum Fund as leading a field of sellers. The Bank of England's account points to the wider tensions in the ERM.
What happened to the pound and interest rates after Black Wednesday?
Source: Bank of England; FRED (DEXUSUK); YX Insights
Chart 2 sets the pound at 100 on 15 September 1992, the day before the exit, when it closed at DM2.7812. By 31 December 1992, it had fallen 11.8% against the Deutsche Mark, to DM2.4520. Against the US dollar, it had fallen 19.2%, from $1.8715 to $1.5130.
Its low in the year after the exit came on 24 February 1993, at DM2.3213. By the end of 1993, it stood at DM2.5688, still 7.6% below its level of 15 September 1992.
Outside the ERM, the Bank of England could cut rates. It took them to 9% on 22 September and 8% on 16 October. Two more one-point cuts followed, on 13 November 1992 and 26 January 1993, leaving rates at 6%.
The economy returned to growth. GDP grew 2.3% in 1993 and 3.4% in 1994, according to the Office for National Statistics (ONS).
What replaced the ERM after Black Wednesday?
The ERM had been the anchor for UK prices. In October 1992, Lamont wrote to the Chairman of the Treasury and Civil Service Committee, a committee of Members of Parliament, to set a new one: an explicit inflation target.
The first target was a range of 1% to 4%, according to a 1997 lecture by Mervyn King of the Bank of England.
The target used the Retail Prices Index excluding mortgage interest payments (RPIX).
Source: ONS (CDKQ); YX Insights
Chart 3 shows RPIX inflation from 1988 to 1998. It peaked at 9.5% in September and October 1990, then fell to 4.0% by September 1992.
From October 1992 to April 1997, RPIX inflation stayed between 1% and 4% in all 55 months. Its low was 2.0%, in September and October 1994.
In May 1997, the Bank of England was given the power to set interest rates itself. The target became 2.5% on RPIX that year. The UK has kept an inflation target ever since.
Black Wednesday was the day the UK stopped defending a fixed rate it could not hold. The pound fell, rates came down and an inflation target took the ERM's place.
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Common questions about Black Wednesday
What happened on Black Wednesday?
On Wednesday 16 September 1992, the UK took the pound out of the European Exchange Rate Mechanism. That morning, UK interest rates went from 10% to 12%. The Bank of England spent about $22 billion of reserves supporting the pound. The defence failed that evening.
How much did Black Wednesday cost the UK?
The UK Treasury's best estimate was £3.3 billion, in papers released in February 2005. The cost came from buying pounds with foreign reserves just before the pound fell. Earlier estimates had run from £13 billion to £27 billion. The Bank of England spent about $22 billion of reserves on the day itself, according to the historian Alain Naef. Spending reserves is not the same as losing them.
How much did George Soros make on Black Wednesday?
George Soros's Quantum Fund was reported to have made about $1 billion, according to the Encyclopaedia Britannica. Soros sold billions of pounds in the days before Black Wednesday. Much of the trade was funded with borrowed money. The pound then left the European Exchange Rate Mechanism and fell. His fund bought the pounds back for less.
What happened after Black Wednesday?
The pound fell 11.8% against the Deutsche Mark by the end of 1992. The Bank of England cut interest rates from 10% to 6% by January 1993. In October 1992, the UK set its first inflation target, a range of 1% to 4%. The economy grew 2.3% in 1993 and 3.4% in 1994.
DISCLAIMER: This article is strictly educational. Any information or analysis in this note is not an offer to sell or the solicitation of an offer to buy any securities. Nothing in this note is intended to be investment advice and nor should it be relied upon to make investment decisions. Any opinions, analyses, or probabilities expressed in this note are those of the author as of the note's date of publication and are subject to change without notice.