The Bourke Street driver waved at a specialist police unit blocking him and they let him through believing "he just wanted us out of the way".
Just hours later, Jimmy Gargasoulas would claim six lives in his Melbourne CBD rampage.
Senior Constable Gregory Ralston from the critical response team has told an inquest he came face to face with Gargasoulas in a South Melbourne street on the morning of January 20, 2017.
At the time, the offender was in a stolen car after stabbing his brother, had just evaded officers and was being chased by multiple police units.
He was travelling up to 40 kilometres per hour when his path was blocked by the vehicle driven by Sen Const Ralston and his partner.
The officer said as their vehicles edged closer, Gargasoulas slowed his speed and waved for him to move in order to avoid an accident.
"I took that to mean he didn't want to ram police or that he was trying to run us down in any way, he just wanted us out of the way," Sen Const Ralston said.
"It happened so quick. I was thinking we either attempt to block him in or move the vehicle out of the way.
"The car was on us. That's when I made my decision. I just turned right and allowed him to pass."
Gargasoulas could have easily passed by mounting the gutter, but at the time Sen Const Ralston believed the only options were to move or crash.
Under cross-examination from a lawyer representing the six people killed, Sen Const Ralston agreed the encounter was "potentially" an opportunity to engage with Gargasoulas so he could be arrested.
"An opportunity but I wouldn't agree it was a safe opportunity," he added.
"There's nothing to suggest he wouldn't have put his foot down and aim at us directly.
"I removed that risk altogether by letting him move around."
Sen Const Ralston said arrests had to occur in line with policy, even for the most heinous offenders.
"It was never stressed it was of utmost importance to breach policy to get him arrested then and there," he said.
Shortly after, a police pursuit of Gargasoulas was initiated and then terminated for safety reasons.
On Monday, Sergeant Matthew Peck - who was in the vehicle with Sen Const Ralston - conceded the encounter was a missed opportunity to apprehend the offender.
Later that day Gargasoulas drove onto city footpaths and mowed down pedestrians, killing six and injuring 27 others.
The inquest continues on Wednesday.
Australian Associated Press