The triple whammy of upbeat news on the economy raised hopes of a further cut in interest rates but also revived fears of an unsustainable consumer boom in the run-up to the next election.
The FTSE-100 index of Britain's leading companies ended the day 35.5 points higher at a record 3,873 as lower public borrowing figures and renewed hopes of interest-rate cuts sent shares soaring.
Meanwhile, a report from the National Institute of Economic and Social Research said that economic conditions were now similar to those a decade ago when Britain witnessed the biggest boom in the property market since the Second World War. The institute is predicting an increase in house prices of more than 10 per cent next year.
The euphoria in the City of London was spurred by a spate of recent good economic news, culminating yesterday in further evidence of booming sales to the consumer and strong public finances. John Lewis, the department store chain, revealed that sales rose 23 per cent in the first week of August, compared with a year ago. It expected sales to be 7.5 per cent higher in the latest six months of the year.
Meanwhile, the British Retail Consortium said that credit-card sales in the high street broke the pounds 1bn barrier for the first time in the second quarter of the year. Andrew Sentance, BRC's senior economic adviser, said this reflected the general improvement in the climate over the first half of the year.
Economists said official figures showing that central and local government repaid pounds 1.66bn in debt last month had put the Government's forecasts for public borrowing back on track and would strengthen the hand of the Chancellor, Kenneth Clarke, for tax cuts in November's Budget. Hopes that he may override the opposition of Eddie George, Governor of the Bank of England, to further interest-rate cuts were fanned by rumours that the Bundesbank may lower German rates on Thursday.
Adam Cole, an economist at stockbrokers HSBC James Capel, said the Chancellor could "hang another rate cut" on last week's inflation figures, which showed the underlying rate of retail price rises unchanged in the three months to July, while the underlying level of industry's costs are at their lowest for a generation.
But yesterday's borrowing figures will give renewed encouragement that Mr Clarke will have scope to cut taxes as well in his November Budget. Economists said that, after overshooting the Treasury's pounds 26.9bn target so far this year, the July figures are back in line.
However, observers warned that much of yesterday's enthusiasm could dry up later in the year. The market was partly driven by technical considerations deriving from the futures market and political uncertainties and arguments over monetary policy could return to haunt equities.
Richard Kersley at the brokers Barclays de Zoete Wedd warned that markets had not factored in fully the prospect of a Labour government and said new worries may emerge around the time of the party conferences in the autumn - "Squabbles between Eddie George and Ken Clarke, concerns that monetary policy is too loose".
The NIESR said that the real cost of buying a house was at its lowest level since 1989. It also pointed to the high level of loans that banks and building societies are prepared to advance against properties. It estimates that the loan-to-value ratio is the highest since mortgage lending was deregulated 30 years ago.
Earlier this week the Halifax, Britain's biggest mortgage lender, gave a further boost to the housing market by offering to indemnify buyers from being caught by negative equity.
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