Actually it's related to a theoretical "zero-risk" investment. Mortgages come with some risk, therefore they need to be priced above the returns for a zero-risk investment. In an inflationary economy, the theoretical "zero-risk" investment is typically something better than just holding the cash, but it can be smaller than inflation (meaning there is no way to gain money without accepting some amount of risk), or it can be larger than inflation. It has varied over time in a way that does not match up with inflation, which disproves your statement.

Side note:

In a deflationary economy, then "zero-risk" would be just holding on to the cash. Of course, that's still not risk-free since you might have been wrong about the economy being deflationary.

I genuinely can't tell if you understand what I said or not. (It isn't my finest work, but if you read my reply in the context of the post to which I was replying, it will make more sense.)

I'm well aware that there's a risk-spread over the base rate for mortgages. My point was that the GP said he worked in a bank pricing credit and never had to figure anything to do with inflation; he only had to deal with a cost of funds figure and therefore banks don't price inflation into credit products.

My point was that cost of funds figure WAS the inflation figure.

Now, if you're arguing that there isn't 100.000% correlation between the various cost of funds rates and the various measures of inflation, I'll agree, but posit that the correlation is high, just not perfect.

I think the correlation is very weak. We've had very high cost of funds in times of low-inflation. All the bankers care about is if they can make more money lending it out as a mortgage than they can putting it somewhere else (after factoring in risk). If there is no low-risk inflation hedge, then they could very well lend out money at rates below inflation (after factoring in their risks), since that could still be a higher return than any available lower-risk investment.