Industry was said to be prepared for further growth

The forecast comes in the Bank of Scotland's corporate index of leading economic indicators.

It suggests that the rising trend which began in the first quarter of this year would continue into early 2005.

Growth was set to peak, however, in the middle of next year, before moderating in the second half towards a more average rate.

The index showed that the effect of tighter monetary policy was starting to have a dampening effect, with a slowdown in economic expansion expected around the start of the third quarter.

It is reassuring that Scotland's industrial base appears geared towards a period of prolonged expansion Tim Crawford Economist

But the bank said higher interest rates were likely to affect Scotland less than the wider UK economy, with the country's solid industrial base supporting economic expansion during the coming year, as the rising cost of borrowing subdues the boom in public spending.

High levels of consumer spending and the over-heated property market, stoked by historically low interest rates, have prompted the Bank of England's Monetary Policy Committee (MPC) to raise the base rate five times in less than a year.

But rates were frozen for the second consecutive month at 4.75% almost a fortnight ago, having climbed from 3.5% in November last year - an indication the MPC was confident the rises were having the desired effect of cooling house prices and curbing high consumer borrowing.

Data on new car registrations, which help to gauge consumer appetite for significant credit purchases, showed a 4.5% decline on the three months to September compared with the same period a year ago, the Bank of Scotland said.

'Strong optimism'

Tim Crawford, group economist at the bank, said: "The latest data continues to provide encouraging news on the likely future performance of the Scottish economy.

"Growth is set to improve over the next six months before moderating around the mid-point of next year - in line with what we would expect given the tightening of UK interest rates over the past year or so.

"With consumption and house price growth most likely to be affected by higher interest rates, it is reassuring that Scotland's industrial base appears geared towards a period of prolonged expansion."