The FTSE 100 index ended nearly 61 points higher at 4,168.2. Figures earlier this week showing subdued inflation at the factory gate sent fears of an early rise in the cost of borrowing into retreat.
Shares in New York opened higher after further evidence that strong growth in the US is going hand in hand with low inflation. The Dow Jones index closed 53 points higher at 6,762.29 after figures showing that retail sales volumes rose 0.6 per cent last month while headline inflation was unchanged at 3.3 per cent.
The Chancellor is due to meet Eddie George, Governor of the Bank of England, this afternoon. New figures today are likely to show a fall in the number of people claiming unemployment benefit last month. The two men will also have a preview of December's headline inflation rate, expected to dip after two disappointing months.
A report yesterday predicted that the official unemployment count could fall below 1.5 million without triggering inflation. The Centre for Economics and Business Research, a consultancy, said greater labour market flexibility meant there was scope for another 500,000 people to leave the unemployment register.
But author Douglas McWilliams said unemployment was falling dangerously fast. A fall of about 10,000 a month "would be consistent with inflation staying low and hence with a sustained reduction in unemployment," he said.
However, the Labour Party yesterday challenged the official jobless figures. Employment spokesman Peter Hain said that including people who would like to work but had withdrawn from the jobs market and those on training schemes meant almost 4.5 million people wanted work - about twice the headline figure.
"These figures show why no one believes this Government's claims about unemployment," he said.
The Government seized on a surprise drop of 95,800 in the number of unemployment benefit claimants in the latest month as evidence of the success of its economic policies, although the decline was exaggerated by the introduction of the jobseekers' allowance.
Separate figures yesterday confirmed the pick-up in the housing market. Halifax reported a 4.5 per cent rise in Greater London house prices in the fourth quarter of last year, taking the annual rate in the booming capital to 14.9 per cent.
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