FRANKFURT – While the European Central Bank might reduce household fuel costs by raising interest rates, this could have a detrimental effect on industrial output and lead to higher unemployment. This was stated Wednesday by the German Institute for Economic Research (DIW) in a research paper.

Inflation at a record 7.5% is putting pressure on the ECB to tighten its policies, even though rapid price rises are largely due to soaring gas and oil prices. This is largely beyond the control of the bank.

A rate increase would weaken the euro and the energy cost would drop since most commodities are denominated as dollars.

DIW, a leading think tank said that time series models of Germany showed an increase in interest rates would reduce headline inflation by 0.2%, heating and fuel costs by up to 4.

The report added, “An interest rate rise would also derail industrial productivity and increase unemployment in an already slow economic recovery.”

While conservative policymakers including Germany’s central bank chief are pressing the ECB for a rate increase, the bank has not committed to rates. They argue that there has been exceptional uncertainty due to the conflict in Ukraine.

Markets have priced in 60 basis points of rate hikes over the course this year. Investors expect the negative 0.5% deposit interest rate to return in positive territory for first time in 10 years.

DIW argued that the ECB’s decision to make the move will be a problem due to the complex tradeoffs.

“If it reduces inflation it will also slow economic recovery. It is important that the ECB fulfills its responsibilities, and conveys credibly that it will be taking the required action.