Feb. 17 (Bloomberg) -- Brazil's main stock index rose 2.7 percent, the best performance of the world's primary equity indexes, on optimism the central bank will reverse course and cut interest rates this year, helping bolster economic growth.

The Bovespa index of the most traded shares on the Sao Paulo stock exchange rose 706.83 to 27,090.91, a record. The index was the best performer in both local currency and dollar terms among the 60 indexes tracked by Bloomberg.

Brazilian stocks rallied after the central bank yesterday raised the benchmark lending rate to a 14-month high of 18.75 percent to help stem inflation. Investors including Audrey Kaplan at Rochdale Investment Management said they expect the bank to start lowering interest rates later this year as the outlook for inflation improves, spurring growth in South America's largest economy.

``People are buying Brazilian shares despite the rate increases, looking forward to rates coming down in the future,'' said Kaplan, who helps manage $1.4 billion of stocks and bonds in 32 countries from Rochdale in New York. ``Almost every country that we monitor are expecting rising short rates over the next 12 months. Brazil is in a different cycle then the rest of the world economy.''

Rio de Janeiro-based telephone company Tele Norte Leste Participacoes led gains, rising 3.7 percent to 43.69 reais. Elsewhere in the region, Mexico's Bolsa fell 65.93, or 0.5 percent, to 13,574.83 as of 3:38 p.m. New York time. Morgan Stanley's index of Latin American stocks rose 1.6 percent to 1580.64.

Earnings

The Brazilian market is trading at 7.5 times its companies' 2005 earnings forecasts, which makes it the cheapest among 32 world markets tracked by Rochdale, Kaplan said. The Sao Paulo bourse, Latin America's largest with a market value of $363 billion, attracted 1.63 billion reais ($636 million) of foreign investment this year through Feb. 10, almost equal to the total 1.8 billion reais for all of 2004.

The Brazilian central bank's sixth interest rate increase since September yesterday may have been enough to bring analysts' forecasts closer to the bank's goal this year of a 5.1 percent annual inflation, said Alvaro Bandeira, a partner at Rio de Janeiro-based Agora Senior Corretora, Brazil's largest stock brokerage.

The inflation rate fell to 7.4 percent in January from 7.6 percent in December, the government said on Feb. 14. The annual rate is down from a seven-year high of 17.2 percent in May 2003. Economists surveyed weekly by the central bank expect the economy to expand 3.7 percent this year after expanding more than 5 percent last year.

``High interest rates certainly don't help, but the prospect is still for economic growth and good corporate results this year with a better corporate debt profile,'' Bandeira said.

The Bovespa has 7.1 percent this year in dollar terms and 3.4 percent in local currency terms. The index rose 28 percent in dollar terms last year.

To contact the reporter on this story: Telma Marotto in Sao Paulo at at tmarotto1@bloomberg.net

Last Updated: February 17, 2005 15:47 EST