Despite the rising inflation rate, the European Central Bank (ECB) is sticking to the German zero interest rate policy and is not planning any deviations from the current key interest rate, at least until the end of the year.

Studies by the German Institute for Economic Research (DIW) show that an interest rate hike could lower German energy prices by up to 4 percent.

With interest rates rising, the euro would appreciate, which would lower dollar-denominated oil product prices.

However, such a measure would also result in higher unemployment.

"If the euro appreciates, consumer prices for fuel and heating costs in Germany will drop significantly," say DIW researchers Alexander Kriwoluzky, Gökhan Ider and Frederik Kurcz.

It would thus be possible for the ECB to ensure price stability in the euro area and to relieve consumers in the medium term.

The American Fed and the Bank of England have raised interest rates in recent months in response to increased inflation, but the ECB has not followed suit.

relief for consumers

The DIW study comes to the conclusion that an interest rate increase of 0.25 percentage points on the one-year German government bond would reduce consumer prices in Germany by 0.2 percent in the same month.

“Both heating costs and fuel react strongly to an interest rate hike,” it says.

Fuel prices would thus fall by four percent and the researchers also expect electricity and heating energy to be reduced by up to 2 percent.

The price reductions would be due to the appreciation of the euro, which would be accompanied by an interest rate hike.

"Since the interest rate hike makes investing in euros more attractive for investors, the euro is appreciating against other currencies," explain the economists at the DIW.

“After the interest rate hike, the effective exchange rate of the euro rose sharply by two percent and remained elevated for around ten months.

This means that for the same amount in euros, buyers from the euro area receive 2 percent more of the oil traded in dollars.”

German consumers would then notice that petrol at the filling station would be cheaper and that the price of heating oil would also fall by nine percent.

So while a rate hike is very positive, there is a downside, which includes unemployment and a slowdown in industrial production.

"Poorer financing conditions and falling demand caused the unemployment rate to rise by a little more than 0.1 percentage points after the shock," according to the DIW study.

While industry has the potential to bounce back within a few months, the increase in unemployment does not.