MADRID, Jan 7 (Reuters) - The European Central Bank has
firmly anchored inflation expectations, allowing it to slash
interest rates in the past two months, Executive Board member
Jose Manuel Gonzalez-Paramo said in a newspaper on Wednesday.
The euro zone economy has yet to feel the full impact of 175
basis points in rate cuts, and future monetary policy decisions
will rest on price stability, Gonzalez-Paramo said in an opinion
piece in Spain's Expansion newspaper.
"This room for manoeuvre to act, which is always necessary
at every moment, has been created by the solid anchor on medium
term inflation expectations," Gonzalez-Paramo wrote.
The ECB will continue to set monetary policy "orientated
towards its credibility in guaranteeing medium term price
stability," he said.
The ECB meets to discuss rates on Jan. 15. Markets have
priced in a 50 basis point cut from the current 2.5 percent,
with some investors betting on a 75 basis point move after the
last such reduction in December.
Gonzalez-Paramo said rate cuts, liquidity operations and
inter-government cooperation had prevented a financial collapse,
but markets still lacked confidence.
"The lack of confidence is due to uncertainty over the
strength of financial institutions and their ability to resist
new shocks," Gonzalez-Paramo wrote.
Confidence will only return if monetary policy focuses on
inflation, ample liquidity is provided to banks and cooperation
improves amongst regulators and supervisors, he said.
There must also be significant improvement of transparency
on potential risks within the global financial system.
"Efforts must focus on those institutions, markets and
financial instruments that, today, are subject to little or no
regulation but generate risks with a potentially systematic
impact on financial stability," Gonzalez-Paramo wrote.
(Reporting by Andrew Hay and Paul Day; Editing by Victoria
Main)
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