Initially Henry & Catherine are mutually startled at an unexpected encounter; Catherine is already more easily started as she's anxious & self-conscious about sneaking around in someone else's home. I surmise that that area is not one where a family member would expect to find a house guest. I think their conversation begins with Henry attempting to continue his usual teasing banter but her embarrassment leads him to a deeper exploration of her mission & her suspicions, to which he responds with his "Dear Miss Morland" what are you thinking? "This is England & we are Christians" implying that the contents of Gothic novels only occur in France, or Germany or England.