Black Wednesday refers to the date 16 September 1992, when the UK was forced out of the ERM.
The Exchange rate mechanism was a key policy tool for the Conservative government. However, maintaining the value of the £ at over 3DM was hurting the economy because:
- Interest rates had to rise to protect the value of the Pound
- The price of UK exports was less competitive
- The combination of high interest rates and end of the Lawson boom had caused the UK to enter into a recession, with falling house prices and falling GDP. see: UK recession 1991-92
UK Interest Rates and Inflation around Black Wednesday
Market speculators such as George Soros, felt the government’s position was untenable and at some time they would have to devalue. Therefore, the speculators kept selling pounds, forcing the treasury to keep buying them and the government had to keep raising interest rates.
It was estimated the cost of the government’s intervention was £3.4bn. At the time the treasury spent £27bn in buying sterling on the foreign exchange markets.
However, whatever the government did, the markets felt the government couldn’t maintain it in the long term.
Eventually on 16th September the government admitted defeat. It left the ERM and allowed the pound to depreciate on the foreign exchange markets. It meant the government could cut interest rates and this allowed the UK economy to recover from recession.