Australians should save more and the government needs to run bigger budget surpluses to prevent a once-in-a-century boom in export earnings from overheating the economy, the country's top central banker said. Reserve Bank of Australia Governor Glenn Stevens said the trade bonanza could boost incomes for years to come, so it was welcome that households were choosing to save rather than spend.

"In fact, we probably need private saving to remain on a higher trajectory, and we will also need public saving to rise, as scheduled," Stevens told an economics dinner.

The Labor government has committed to returning the budget to a small surplus by 2012/13, repairing a gaping hole left by the global financial crisis.

Stevens said it might be prudent for the government to save a lot more over the longer term, perhaps in a stabilisation fund.

"That would mean accepting considerably larger cyclical variation in the budget position, and especially considerably larger surpluses in the upswings of future cycles, than in the past," he said.

Stevens noted there were signs that households were already choosing to save more.

Recent revisions to gross domestic product data had lifted estimated household saving by A$45 billion ($43 billion) or about 5 percentage points of income. The houshold savings ratio is now put at 8.8 percent for 2009/10, compared to an initial estimate of 2.9 percent and about -1 percent five years ago.

That was welcome, said Stevens, as the boost to incomes from trade was set to be a very large one. If households chose to spend all their extra earnings, it could generate inflation.

The country's terms of trade -- the ratio of export prices to import prices -- have surged in recent years as Chinese and Indian demand has spurred huge price increases for Australia's two biggest export-earners, iron ore and coal.

As a simplistic example, Stevens noted that five years ago, a shipload of iron ore was worth about the same as 2,200 flat-screen TVs. Today it was worth about 22,000 flat-screen TVs.

Stevens noted the export sector was about one-fifth of the economy and the terms of trade were about 60 percent higher than their average for the 20th century.

This meant there was about 12-15 percent of GDP in additional income available to producers each year the terms of trade stayed that high.

This was in turn fuelling a boom in mining investment that would further add to activity, while a high Australian dollar was making imports cheaper for consumers.

"On all the indications available, we are living through an event that occurs maybe once or twice in a century," said Stevens. "It does not take much imagination to see that an event of this magnitude is expansionary."

That meant policy makers had to be wary of overheating, which is a major reason the central bank has lifted rates by 175 basis points in the past 13 months to stand at 4.75 percent.

Last week, Stevens told lawmakers that his current estimate was that rates were likely to be on hold until around the middle of next year before rising gradually.

A rise in savings was all the more important as it looked like the boost from the terms of trade would be longer-lasting than in past episodes. (Reuters)

Stevens said the RBA was assuming iron ore prices would fall by up to 30 percent over the next several years, but even then the terms of trade would still be historically high.

Indeed, there was every chance that iron ore prices would not fall as much as this, given the unprecedented expansion of demand for steel in China and India, he added.

"So the most prudent assumption to make might be that the terms of trade will be persistently higher than they used to be," said Stevens.

"It is sometimes said that Australia manages adversity well but prosperity badly," he concluded. "There will never be a better opportunity than now to show otherwise."