The Bank of Canada will deliver a speech on "the balance sheet normalization process and how the Bank will manage its balance sheet once normalization ends" on Thursday, noted Scotiabank.

The speech will be delivered in Toronto by Deputy Governor Toni Gravelle who is head of the Financial Markets Department and the Banking and Payments Department. He is brought out any time the BoC feels it necessary to update or alter its balance sheet management plans and has delivered several important speeches on the topic, like this one last March, pointed out Scotiabank.

There is no greater pressure on the Canadian Overnight Repo Rate Average relative to the policy overnight rate. The spread is small at 3bps, and there has been a small positive spread for almost a year and a half since the late summer of 2023.

It's neither widening nor narrowing and it hasn't caused much concern at the BoC before. The BoC has basically indicated it can live with a small deviation and it isn't changing.

-- To date, the BoC has tended to dismiss concern that this spread may signal it's tightening liquidity too far and putting more upward pressure on market rates than the policy rate is trying to steer by instead saying that at times it has been a function of other things like liquidity and funding pressures in repo markets having to do with market speculation over future policy rate changes. It has said nothing to indicate greater concern.

-- To date, the BoC has relied upon the use -- or threatened use - of other tactics to steer the market measures of its policy rate more closely toward the administered policy rate, or to avoid allowing it to deviate further. Cash management bills, receiver general auctions, repo operations and forward guidance are included on this list.

-- The BoC is far away from its outlined goals for determining when to end quantitative tightening (QT) -- the process of allowing the bonds it bought during the pandemic to mature and drop off the balance sheet at a 100% rate with no reinvestment. The BoC has said it wants settlement balances to fall back to a range of C$20 billion to C$60 billion before ending QT. Yet it is anywhere close to this target with balances at almost double the upper end of this range and holding remarkably steady throughout the past year for various reasons not fully related to their QT program.

-- Canada is heading into a period of potentially heightened uncertainty with possible tariff threats and retaliation around the corner. A steady hand is required, so maybe the speech will offer assurances that the BoC will do what it takes to preserve market functioning.

It's also possible that the reference to balance sheet management as a topic isn't the real focus. This is the last scheduled opportunity for a Governing Council member to speak before the communications blackout kicks in on Jan. 21 before the decision on Jan. 29. Friday's robust jobs report offered some assurances on the economy, added the bank.

One other possibility could be to offer a sneak peek at the plans to offer more detailed modeling of a tariff threat in the January Monetary Policy Report. Governor Tiff Macklem indicated the BoC would be doing so when he spoke in December. Any attempt at that is likely to be similar to Scotiabank's since it doesn't know exactly what will happen.

Embedded within that may also be a reminder of how the BoC may act in response to tariff wars in that its primary focus will be on achieving 2% inflation over the medium term come what may. Stronger easing may be likely if Canada faces tariffs but doesn't retaliate. Less easing or tightening may be likely if Canada does retaliate in a significant way.

The bank would also expect assurances that the BoC will ensure proper market functioning throughout this period and do whatever is necessary.

Finally, it would be interesting to hear what Gravelle may say by way of how the BoC could manage the balance sheet if a surge of deficit financing in response to tariff wars results in much greater bond issuance, according to Scotiabank. There is a high bar to bringing back quantitative easing in Canada and so this is more likely the sort of thing to park in the back of your mind for now.

However, to allow ongoing QT to dump bonds back on the market while issuance is surging -- if this is a sustained scenario -- could be a tough pill to swallow for bond market participants. The BoC would be less likely to weigh in on the topic if surging bond financing was due to profligate policies, but what about a crisis brought on by trade wars, asked the bank.