Nov. 3 (Bloomberg) -- Brazilian stocks rose to the highest in two weeks after an agreement by two of the nation's biggest banks to merge fueled speculation of more consolidation in the financial industry to overcome the credit crisis.

Banco Itau Holding Financeira SA and Uniao de Bancos Brasileiros SA surged 15 percent after agreeing to create the nation's largest bank with 575 billion reais ($261.4 billion) in assets. Gafisa SA led a rally in homebuilders after economists in a central bank survey said interest rates are likely to stay unchanged this year, instead of its previous forecast of a half- percentage point increase by yearend.

``It's an enormous surprise and will create a very strong number 1 player in the banking sector,'' Urban Larson, Latin America portfolio manager at F&C Management Ltd. in London, which oversees about $2.5 billion in stocks.

The Bovespa gained 0.8 percent to 37,551.19 at 8:35 a.m. New York time. Chile's Ipsa rose 2.2 percent. The MSCI Emerging Markets Index rose 2 percent.

Itau, Brazil's second-biggest non-state bank, jumped 15 percent to 26.84 reais. Unibanco, the third-biggest non-state bank, gained 15 percent to 15.75 reais. The transaction may signal that Brazilian financial institutions will have to consolidate to ride out the global financial crisis. The accord follows 15 months of negotiations between Itau and Unibanco.

Gafisa rose 4.9 percent to 16 reais, leading a rally in homebuilders on easing concern higher borrowing costs will slow demand for homes.

The central bank will keep the benchmark interest rate unchanged at 13.75 percent by the end of this year, compared with a previous forecast of 14.25 percent, according to the survey, which was taken Oct. 31 and published today. Policy makers will cut the benchmark rate to 13.38 percent by the end of 2009, compared with a forecast of 13.5 percent last week, according to the survey.

To contact the reporters on this story: Alexander Ragir in Rio de Janeiro at aragir@bloomberg.net.

Last Updated: November 3, 2008 09:01 EST