The problem is either in your preferences or how you scaled them on the sequence. Set the Preferences option on the Media tab for default scaling to "set to framesize" rather than "scale to framesize".
With "scale to framesize", Premiere rasterizes the image to the sequence size. So yes, if you then resize up, you see pixelization pretty quick.
With "set to framesize" Premiere still "sees" the original pixel count, it just auto-scales the image to the size of the sequence. And any re-sizing you do on the sequence is done from the original pixel resolution.