Britain Raises Interest Rates to Save the Pound. Hours Later, It Abandons the Defence.

The 12% rate happened. The 15% rate did not.

On Wednesday, 16 September 1992, the British government tried to defend the pound inside Europe’s Exchange Rate Mechanism.

It did not lack determination.

Britain had joined the ERM in 1990, committing sterling to remain within a permitted band against other participating currencies. By 1992, recession at home, high German interest rates and growing market pressure had made that commitment increasingly difficult to maintain.

On Black Wednesday, the Bank of England bought sterling in an attempt to support its value.

The government also raised its minimum lending rate from 10% to 12%. That increase took effect.

Then it announced a further rise to 15%, scheduled for the following day.

The announcement was intended to make sterling more attractive and demonstrate that the government would defend the ERM rate.

Markets remained unconvinced.

That evening, Chancellor Norman Lamont announced that the United Kingdom was suspending sterling’s membership of the ERM. The planned 15% rate was cancelled before it began.

By the following morning, the rate was back at 10%.

The day is often reduced to a duel between the British government and George Soros, whose funds profited from betting against sterling. His role was important, but the pressure was much broader than one trader. The episode reflected a large market judgment that the existing exchange rate could not be sustained under the prevailing economic conditions.

The Bank of England later estimated the eventual cost of the episode to the Exchequer at more than £3 billion.

In one day, Britain used currency purchases, an interest-rate increase and the announcement of an even larger increase to defend the pound.

Then it abandoned the defence.

The 15% rate became one of the day’s most famous numbers without ever becoming the day’s actual rate.