LONDON investors shrugged off edginess over Britain’s slowing economy yesterday to propel the FTSE 100 index to a close above the watershed of 5,500 for the first time in four years.

City equity strategists predicted that the blue chip benchmark was poised for further gains in the rest of the year as the market’s spirits were buoyed by the FTSE’s close at 5,501.5, up 23.8 points on the day to its best finish since August 2001. The index has risen 7.01 per cent over the past three months, its biggest quarterly advance since 2003.

The breakthrough came as anxieties over the economic outlook for Britain were eased by a stronger-than-expected survey of manufacturing, which showed activity in the hard-pressed sector rising at its fastest in six months.

However, strategists, some of whom are raising forecasts for the FTSE’s full-year performance, said that optimism among bullish investors was being driven more by blue chips’ financial performance than the gloomy economic backdrop. “Profitability is very high,” Robert Parkes, of HSBC, said. “Profit growth is still strong and valuations are cheap.”

Mr Parkes said that as well as robust earnings and signs that some companies had completed much of the strengthening of balance sheets that they saw as necessary, the FTSE was also being boosted by strong mergers and acquisitions activity — particularly involving private equity and foreign buyers of British assets.

He noted that, despite the slowdown in the British economy, many of the blue-chip groups in the FTSE were more exposed to the overseas economic outlook, while Britain remained “relatively sheltered” from the impact of near-record oil prices.

In present conditions, the market could easily see a “re-rating” of share valuations that would “give us another leg-up” for the FTSE 100, Mr Parkes added.

Mike Lenhoff, chief strategist at Brewin Dolphin, the securities group, is also bullish. His firm has raised its year-end target for the FTSE to 5,700, from 5,250 previously.

Economists said that the strong expansion of industry’s order books was a particularly encouraging sign.

As the Bank of England’s Monetary Policy Committee (MPC) prepares to begin its two-day meeting on interest rates tomorrow, the news reinforced the City’s conviction that borrowing costs will be pegged.

The hawkish element on the MPC will see its case strengthened by further signs in yesterday’s data of the inflationary impact of soaring energy costs.

The survey’s index of manufacturers’ input costs climbed to a five-month high of 59.3 last month. There were also indications that companies were managing to pass on at least some of these costs to customers, as the CIPS output price index rose to its highest since February, at 52.8.

The stronger conditions in British industry were mirrored across the Channel, where the latest eurozone purchasing managers’ survey also pointed to faster manufacturing growth last month. The eurozone data’s headline index rose to 51.7 for September, from the previous month’s 50.4, exceeding analysts’ expectations.

• Tokyo’s resurgent markets took a pause yesterday as mediocre corporate confidence figures suggested that a substantive economic recovery may be under threat from high oil prices.

  The Bank of Japan’s Tankan report, which was expected to mirror the buoyant mood among investors, reflected a creeping sense of caution among manufacturers. The result sent the Nikkei 225 down 49.02 points to 13,525.28, slowing a sustained stock market rally that has been under way since May. Japanese equities have soared to four-year highs.