Molecular dynamics free energy perturbation simulations utilizing the empirical valence bond model are used to study the catalytic action of beta-cyclodextrin in ester hydrolysis. Reaction routes for nucleophilic attack on m-tert-butylphenyl acetate by the secondary alkoxide ions O2(-) and O3(-) of cyclodextrin giving the R and S stereoisomers of the ester tetrahedral intermediate are examined. Only the reaction path leading to the S isomer at O2 shows an activation barrier that is lower (by about 3 kcal/mol) than the barrier for the corresponding reference reaction in water. The calculated rate acceleration is in excellent agreement with experimental data. The catalytic action is accompanied by distortion of the macrocycle structure that enables strong binding of the nonpolar part of the substrate along most of the reaction path.