UPDATE 1-Inflation expectations anchored-ECB's Paramo

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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)