this is a late answer, but for anyone who has the same problem: in the template file /blog/templates/Layout/BlogEntry.ss you find the variable $Content . Simply change this to $Content.RAW , this should display the html code correctly.
Excellent solution. I've modified it one step further by adding:
in the BlogSummary.ss field where the actual summary would be placed. This actually trims to the sentence in HTML. It works great if you're not doing complex HTML posts... I do have an issue though, all looks and works well, but I'm getting a Error Saving Content message inside the admin. It seems to be saving okay, however this site will be managed by users other than myself. Is there another adjustment that needs to be made to address that?