Black Wednesday and the forced exit from the ERM

Britain had joined the European Exchange Rate Mechanism in October 1990 at a central rate many economists viewed as too high, locking sterling to the Deutsche Mark just as Germany, absorbing the costs of reunification, was running inflationary pressures that kept Bundesbank interest rates elevated while the UK economy was mired in recession and needed lower rates. On September 16, 1992, speculative selling forced the Bank of England into emergency intervention, spending roughly £6 billion of foreign-exchange reserves in a matter of hours and announcing a rise in interest rates from 10% to 15% in a single day, yet sterling still could not be held above its ERM floor and the government withdrew the currency from the mechanism that evening. In the Bank's own Quarterly Bulletin review that followed, Governor Robin Leigh-Pemberton framed the central policy task afterward as pursuing a more balanced domestic policy no longer dictated by the consequences of German unification, while still preserving the medium-term commitment to low inflation that the ERM had been meant to anchor. The episode, with sterling subsequently depreciating sharply, led directly to the UK's adoption of an explicit inflation target later that same year.