Islamic State 'definitely' behind Jakarta attack: Police chief

A Jakarta police spokesman said five police officers died from gunfire wounds and two civilians, including one Canadian, were killed in bombings, the Associated Press reported.

Indonesia's Co-ordinating Minister for Political, Legal and Security Affairs, Luhut Panjaitan told local media that "five terrorists were killed, we are not sure whether there are more people are out there, but the investigation is ongoing."

The latest attack focused on the central business district. According to the official Twitter account of Jakarta police, one explosion went off in front of the Sarinah mall shopping center. Media reported that a police post outside the mall was blown up. The area is also home to luxury hotels and some embassies.

"The attack was likely timed to hit busy lunchtime traffic and was centered on the convergence of Wahid Hasyim street and Medan Merdeka, close to Jakarta's high security area. The location is a short drive from the US Embassy and other government offices," consultancy Stratfor said in a report Thursday.

One blast was in a Starbucks cafe and security forces were later seen entering the building, Reuters reported.

"The Starbucks cafe windows are blown out. I see three dead people on the road. There has been a lull in the shooting, but someone is on the roof of the building, and police are aiming their guns at him," a Reuters photographer said in a wire report.

Tri Seranto, a bank security guard, told The Associated Press he saw at least five attackers, including three suicide bombers who exploded themselves in the Starbucks. He said the other two attackers, carrying handguns, entered a police post from where he heard gunfire and that he later saw one policeman dead and three seriously wounded, the AP said.

In a statement, Starbucks said one customer was injured and its employees were confirmed safe; the company said it plans to close all of its Jakarta stores until further notice "out of an abundance of caution."

The Jakarta Globe reported on its website that a police officer said there were indications that some of the shots were fired by snipers in the office buildings in the area, although this could not be confirmed.

Indonesia is the world's most populous Muslim country and has previously faced issues with homegrown terrorist groups.

The country has been on high alert since authorities said they had foiled a plot by Islamic militants to attack government officials, foreigners and others, the AP reported. About 150,000 police officers and soldiers were deployed on New Year's Eve to guard churches, airports and other public places, the AP reported.

The last time Indonesia suffered a major militant attack was the twin suicide bombings at the JW Marriott and Ritz Carlton hotels in July of 2009.

"We haven't seen anything like this in Indonesia - a sort of international focused attack -- for a number of years now," Steve Wilford, Asia-Pacific director for global risk analysis at consultancy Control Risks, told CNBC. "There's at least 500 Indonesians known to be in the Levant (the area of the Middle East that includes Syria). It's very unclear how many have actually come back." Wilford noted that there are also around 30 organizations in Indonesia claiming affliations to Islamic State.

This isn't the only recent violent incident in Indonesia recently, Wilford noted. "there's actually been a number of these in Indonesia that haven't been particularly well publicized, because they were so unsuccessful and so amateurish," he said.

Both the US and Australian embassies warned travelers to avoid the immediate area. The Australian embassy also urged "a high degree of caution" in the country as a whole due to a high threat of a terrorist attack. Malaysia also raised their alert level to its highest level.

The latest blasts and melee sent Indonesian markets tumbling. The Jakarta Composite was trading around 0.2 percent down before the blasts, but then traded down as much as 1.8 percent after the explosions, before retracing losses to trade off around 0.4 percent. The dollar-rupiah pair climbed, with the greenback fetching as much as 13,960 rupiah, compared with around 13,880 rupiah before the blasts.

The rupiah later recovered, with the greenback fetching just 13,850 rupiah in afternoon trade.

In the afternoon, Indonesia's central bank said it cut its benchmark interest rate by 25 basis points to 7.25 percent, as was expected in a Reuters poll of analysts. Bank Indonesia had earlier announced that it would proceed with its meeting even though the explosions were less than two kilometers from its office, Reuters reported.The attack may make complicate efforts to revive the country's flagging economy and Indonesia's President Joko Widodo's initiative to drive tourism growth.

"He is aiming to lift tourism's contribution to GDP from 9 percent in 2014 to 15 percent by 2019. Foreign tourist arrivals had grown by 7.19 percent last year and this pace of growth could be expected to slow in 2016 given today's events," ANZ said in a note Thursday. ANZ estimated the attack could shave 0.25 percentage point off its growth forecast for the first quarter.

"A quick stabilization in sentiment could see the economic impact of these events limited. If however, further attacks/bombings were to follow, a more significant dual economic impact on both tourism and domestic spending should be expected," it said.

Reuters and the Associated Press contributed to this report.