Australian police have declared a terrorist attack in the centre of Melbourne a “reality check” and a “wake-up call”, as the city mourns a popular restaurant owner who was stabbed to death by the Isis-inspired attacker on Friday.

Police conducted raids at two homes in the city’s western suburbs on Saturday, the day after Hassan Khalif Shire Ali drove a 4x4 vehicle loaded with gas bottles into the city centre, ignited the vehicle into a ball of flames, and then stabbed three people. Shire Ali was shot by police and later died in hospital.

“The event yesterday for us is a reality check, even with the fall of the (Isis) caliphate ... the threat continues to be real,” the acting deputy commissioner for national security, Ian McCartney, said.

Shire Ali, 30, who came to Australian from Somalia in the 1990s, had his passport cancelled in 2015, but was not being actively monitored before the attack, police said.

They also confirmed that he had been “inspired” by Isis, though it was as yet unclear what role, if any, the terrorist group played in Friday’s attack.

“The assessment was made whilst he held radicalised views, he did not pose a threat in relation to the national security environment,” McCartney said.

“Obviously the circumstances of how and when he moved from having those radicalised views to carrying out this attack yesterday will be a key focus of the investigation.”

The prime minister, Scott Morrison, on Saturday blamed the attack on religious extremism.

He said Australia was under threat by a “radical and dangerous ideology of extremist Islam”.

“I am the first to protect religious freedom in this country, but that also means I must be the first to call out religious extremism,” Morrison said.

Backing those comments, the Victorian premier, Daniel Andrews, said he was confident the police had the powers they needed to keep the city safe.

“I want to point out that what we saw yesterday was an act of terror,” said Andrews, who also described the attack as “pure evil”.

Melburnians had not been “cowered” and instead gone about their daily lives on Saturday, the premier added, noting there had been a record crowd at the Stakes Day races at Flemington. Police stepped up security at the racecourse, and said they would do the same for an A-League soccer match on Saturday night.

Outside Pellegrini’s cafe on Bourke Street, mourners paid tribute to the owner, Sisto Malaspina, 74, who was identified as the man stabbed to death by Shire Ali on Friday night.

Patrons left flowers and signed a tribute book left on a bar stool covered in a white table cloth and placed at the doorstep of the popular Italian restaurant. In the window, next to a large photograph of Malaspina, grieving staff left a message describing him as the “best boss”.

“He was very warm, welcoming,” said John Richardson, who has been taking his daughters to dinner there on their birthdays each year for nearly two decades. “He was full of life. You walked in and the place was always buzzing.”

The Bourke Street cafe opened in the 1950s, and was taken over by Malaspina and his colleague Nino Pangrazio in 1974. About 100 metres from the Victorian parliament, it maintained a loyal following as a place where ordinary Melburnians dined alongside the city’s movers and shakers.

“I know we use the word icon perhaps a bit easily or bit casually, but he and Pellegrini’s and the staff and the people who’ve run that place since the mid-70s are part of Melbourne life,” said the opposition leader, Bill Shorten.

Andrews described Malaspina as an “outstanding Victorian”.

The other two victims, Tasmanian retiree Rod Patterson, 58, and a 24-year-old security guard from Hampton Park, are recovering from surgery in hospital.