For some reason, Sancho thinks that saying he hates Jewish people makes him a better Christian. Believe it or not, he makes this comment in the middle of a speech in which he tries to argue that he's a good person. As you can imagine, anti-Semitism was pretty rampant in Spain back in 1605. Sancho's train of thought here is absurd, and Cervantes makes sure to make it even more absurd by placing it in a context where Sancho is trying to prove he's a good guy. Frankly, he's probably saying exactly the kinds of things he hears the village priest saying, but does that make it any better?