Inflation was already beaten. Unemployment was near 10% and still climbing. And Bank Rate was stuck at 10% — not because the economy wanted it there, but because the pound had to be held inside a European currency band. Then, on one afternoon in September, it wasn't.
Play the 1992 scenario →The Exchange Rate Mechanism tied European currencies to one another within narrow bands. Britain joined in October 1990 at a central rate of 2.95 Deutschmarks to the pound, and the point of it was borrowed credibility: after two decades of inflation, a government that could not convince anyone of its own resolve could instead bolt itself to the Bundesbank's.
The catch is the one every fixed exchange rate has. Once you have promised to hold the currency, interest rates stop being yours. They belong to whatever the peg requires — and what the peg required in 1992 was rates far above what a country in recession needed. German rates were high because Germany was managing the cost of reunification. Britain had to match them anyway.
Inflation 3.7% · Unemployment 9.7% · Bank Rate 10% · Twenty quarters, Q3 1992 to Q2 1997
The term ends in the summer of 1997 — the moment the Bank was granted operational independence, and the job in this game became a real one.
Through the summer of 1992 the markets worked out that Britain could not hold the line, and began selling sterling to find out. On 16 September the Bank spent billions of reserves buying pounds, and the government raised Bank Rate from 10% to 12%, then announced a further rise to 15% — all within a few hours. The 15% was never actually implemented. That evening the Chancellor, Norman Lamont, stood outside the Treasury and announced that Britain was suspending its membership of the ERM.
It was, at the time, a humiliation: a policy abandoned in public in a single day, at a cost to the reserves usually estimated in the billions.
Everyone expected the devaluation to bring inflation back. That was the whole reason for joining: a floating pound had a reputation for sinking, and a sinking pound makes imports dearer.
It did not happen. Sterling fell around 15%, import prices rose, and inflation still stayed low — it fell to about 1.2% by mid-1993 and spent the rest of the decade near target. Freed of the peg, rates came down to 6% within months and to 5.25% by early 1994. Unemployment peaked in early 1993 and then fell for years.
The lesson economists drew is the one the scenario is built to make you feel: a monetary policy aimed at the economy in front of you beats one aimed at a promise about a currency. Britain got its credibility back not from the peg but from what replaced it — an explicit inflation target, adopted that October, and eventually an independent Bank.
The honest caveat. This game has no exchange rate. You cannot see the pound, and you cannot defend it. The peg is modelled through the only channel available: while it holds, cutting rates away from German levels pushes imported prices up hard, so relieving the recession genuinely costs you inflation. When sterling leaves the mechanism in your second quarter, that constraint is lifted and a one-off inflationary jolt from the devaluation arrives — both of which really happened. It is the mechanism, not the market drama.
The exit is scripted. It happened whether or not the government wanted it, and in the game it happens whether or not you want it. What is yours is everything after: how fast you cut, how far, and whether you can resist putting rates back up too early when growth returns.
The trap at this end of the range is the mirror of 1974's. In testing, a player who holds 10% throughout — defending a peg that no longer exists — ends the term in outright deflation with unemployment near 15%. Doing nothing is not neutral here. It is the worst available policy, by a distance.
Par is −210, measured rather than guessed. Holding rates flat scores about −314. A generic rule that reacts to the data manages −199 to −227. The rate path the MPC actually ran from 1992 to 1997 scores about −141 and reproduces the history closely — inflation dipping to 1.4%, then settling at 2 to 3.5%, with unemployment falling throughout.
Which makes this the one scenario in the game where the real policymakers come out looking very good indeed. Beating them is possible. It is not easy.
Play the 1992 scenario →See also 1974, the opposite problem, and 2008, the other kind of collapse. The equations are in how the model works.