I would have to say that this pronouncement doesn’t fall into the realm of “faith and morals.” It sounds more like it falls in the area of discipline, so that means it is not an “infallible” statement.
With regard to the Spanish Inquisition, one must keep in mind that it was not run “by” the Church. The Church gave King Ferdinand and Queen Isabella permission to start an inquisition (actually a Roman invention) in order to find heretics who they suspected were part of the nobility’s rebellion at the time. There were many Muslim’s and some Jews who “converted” for other than honorable reason, and remained Muslims and Jews afterward.
The problem occurred when King Ferdinand, after receiving the Pope’s permission, refused to fund the inqusition. He said the inquisitors would have to extract the funds to run the operation from those they arrested and brought to trial, etc.
Now, keep in mind that the only people that the Inquisitors could arrest and bring to trial were Catholics. Those who were not Catholic did not fall under the jurisdiction of the Inquisition. Those who were arrested under suspicion of heresy could provide the court with a list of “enemies.” None of the people on this list could be called to witness against them.
The first few years were very bloody, because the Inquisitors went after the riches nobility (to get funds?). After that, it was fairly mild. In fact, the Inquisitor’s jail was much preferred to the normal prison. In fact, if one blasphemed, one was automatically sent to the Inquisitor’s jail. So, fairly often, if someone was sent to the regular prison, he would blaspheme in order to be sent to the Inquisitor’s jail, where they received better treatment and better food. In fact, it was not unheard of for the Inquisitor jailer to come by in the mornings and ask the prisoners, “If I let you out for the day, do you promise to be back by dark?” And if they said, “Yes” he let them out for the day. If they didn’t come back that day, well, it was Spain…
During this time, the Reformation was going on in the rest of Europe, with huge, bloody battles between Protestants and Catholics. The population of Germany, for example, in one thirty year period, went from 18 million to 10 million due to these battles. And the Catholics were usually the victors of these battles. So, some Protestants took the opportunity to create pamphlets making incredulous claims about how bad the Inquisition was, claiming, for example, that “millions” were tortured and murdered by the Inquisition. Never mind that they had never been to Spain, or that the entire population of Spain was only around 100,000. It was good propaganda for them, though. Some of those lies have survived till today.