I heard and discounted it for just that reason. It reminded me of reading about propaganda from past wars, such as the mythical bayoneting of French babies by German soldiers during WWI.
Overall, though, it seems that Knightly is of the mindset that it's never too late to emulate the late, unlamented Neville Chamberlain. "Peace in our time!", indeed.
This was recycled in WWII but applied primarily to Japanese soldiers with Chinese babies. Making of soap from human fat was already attributed to Germans in WWI. German officers in WWII were also accused of making tobacco pouches from human scrota (this apparently was practised to some extent by U.S. Calvarymen in the Indian wars of the late 19th Century). All in all, it shows that these propagandists don't have much imagination.
By the way it is also alleged, by a not unreliable source, that FDR treasured a paper knife carved from the femur of a Japanese soldier that was sent to him by a soldier fighting in the Pacific.
It reminded me of that, too.
Just a quibble, though: if my somewhat ancient memories of my mother's even more ancient memories of WW1 are accurate, it was Belgian babies.